Introduction to ESG
Environmental, social and governance (ESG) is a framework used to assess an organisation’s business practices and performance in various sustainable and ethical issues 1.
ESG encompasses three core principles 2:
The Environmental principle examines how a company performs as a steward of the planet. It includes issues such as a company’s energy use, the waste and pollution it creates, how it conserves natural resources, and the way it treats animals.
The Social principle examines how a company manages relationships with stakeholders (employees, suppliers, customers and communities where it operates). Examples of factors considered here include regard for employee health and safety, and labor rights.
The Governance principle examines how an organisation is managed and controlled. It includes aspects such as how a company treats its shareholders and their right to vote on important issues, potential conflict of interest when selecting board members, and whether the company engages in illegal practices.
ESG is about the ability to create and sustain long-term value in a rapidly changing world, and manage risks and opportunities associated with these changes.
Several factors have contributed to ESG’s growth in the recent past, the main one being increasing pressure from investors, who are focusing their attention on ESG issues and stakeholder capitalism.
Stakeholder capitalism is a philosophy based on the belief that apart from simply providing returns for shareholders, companies should be mindful of, and responsive to, their impact on society and the environment. This can involve creating jobs for employees, embracing sustainable practices, serving customers loyally, cultivating long-term supplier relationships, paying fair taxes or working to minimize the environmental footprint of operations3.
According to the 2020 EY Climate Change and Sustainability Services (CCaSS) Institutional Investor survey, the conviction of investors is that companies that perform well on ESG are generally less risky, better positioned for the long term and possibly better prepared for uncertainty. Companies failing to meet investor expectations on ESG factors risk losing access to capital markets 4.
The ESG framework has a significant impact on fundamental business issues relevant to the long term success of any company across a majority of industries.
The first business issue is corporate reputation. The way a company manages and communicates about ESG issues signals to investors, customers and other stakeholders, their awareness of risks and opportunities of changing economic, social and environmental conditions. ESG can enhance a company’s ‘licence to operate’ making it easier to accomplish their business objective and respond to crisis scenarios with key stakeholder groups.
The second one is risk reduction. ESG helps identify immediate and long-term risks (e.g material and labor availability, evolving regulation and supply chain distractions), depending on the industry and business model. For instance, consider a milk processing plant that is dependent on a large local labor force to process and distribute milk to the local community. Natural disasters such as floods can affect public transport, disrupting operations.
The third issue is opportunity management. Shifting market conditions (like consumer demands, trends, or competition) and non-market conditions (like regulations, social movements, or environmental changes) can reveal opportunities for growth. Companies can develop new products or services to meet emerging needs, reach new customer groups that are currently underserved or unserved, and form strategic partnerships to address ESG-related challenges effectively, such as reducing environmental impact or improving social equity. This way, companies can proactively adapt to and capitalize on evolving conditions to create value while addressing ESG considerations.
Last but not least, culture & intrinsic value. A company’s ESG maturity is an indicator of its commitment to building a high performing, purpose driven workforce and inclusive culture. A focus on governance encourages transparency and accountability, cultivating a culture of integrity and trust within the organization. Social initiatives like diversity, equity, and inclusion (DEI) programs improve workplace morale, collaboration, and retention by making employees feel valued and respected. Intrinsic value is a forward looking measure of a company’s worth based on its strategy. By addressing environmental and social risks, ESG ensures long-term operational viability, positively influencing perceptions of the company’s intrinsic value. Positive ESG practices also improve relationships with regulators, communities, and customers, which reduces external pressures and increases goodwill.
For example, consider Bidii, a company deeply committed to ESG principles. The company promotes environmental activism, employee well-being, and ethical governance, creating a workplace that attracts talent aligned with its mission, which strengthens its culture. In terms of intrinsic value, its dedication to sustainability and ethical practices has built strong brand loyalty and investor confidence, making Bidii more valuable beyond its financial performance.
The four issues mentioned above can lead to outcomes such as enhanced customer & investor acquisition, reduced disruption and losses, greater workforce productivity & organisation resilience, and identification of new markets/customers, products/services and revenue streams.
Next: Environmental Factors