Why Organisations Should Embrace ESG-led Change
30 June, 2021 - The Purpose Index · Organisational Purpose
Commitments to policies that satisfy environmental, social, and governance criteria deliver the best results when they are fully-embraced by the organisation. Businesses that set aside their grumbles and gripes on the topic of purpose over profit have so much to gain from ESG-led change. The worldwide economy is emerging from decades of corporate social responsibility growth and into a space where ESG commitments are becoming expected, required, and fundamental to business operation.
- The benefits of ESG-led change include increased investment, operational savings, stronger workforces, and more resilient businesses
- Incorporation of ESG criteria into business development is possible at any stage of business
- Businesses designed with additional purposes alongside their profit goals stand to serve society better and live longer
What Is ESG?
ESG stands for environmental, social, and governance and essentially represents a standard or measurement that businesses are using to outline their business goals in a way that directly addresses these criteria. A simplified take on ESG applied to the fashion industry could look like this:
A fashion business might use ESG frameworks to better understand the business's impact on the environment and how they can mitigate any damage they cause by pollution from their business. They could also create sustainable infrastructures to support their resource supplies. Simultaneously, the ‘S’ in the ESG framework indicates a requirement to protect and respect workers in their supply chain and business, whilst the ‘G’ requires good governance practices, which means effective systems and processes that protect the business and allow it to perform at it’s best.
ESG is not CSR, it is not something that a business can independently say they are achieving without requiring some third party acknowledgement of the organisation’s actions. ESG is also not a greenwashing trend.
There are potentially hundreds of different benefits that any organisation in any sector could uncover given the chance to explore ESG-led business strategies. The most notable, and measurable, are:
- increased investment
- operational savings
- happier, stronger workforces
- more resilient businesses
Investors are increasingly investing their assets using ESG data to guide their decisions. In 2014, $18 trillion US dollars were allocated to ESG-related strategies. That number grew to $23 trillion in 2016 and then to $30 trillion in 2018. These substantial increases should not be dismissed as a fad or fluke; investors and business leaders care about issues that go beyond profits.
In 2018, 181 CEOs got together at the Business Roundtable event and released a ‘Statement on the Purpose of a Corporation’, in which they acknowledged a business has so much more responsibility and purpose than simply making money. Instead, businesses have a duty to create an ‘economy that serves all Americans’, which in practical terms means that business responsibilities now extend into society, beyond the primary concern of making profits for the organisation.
Christine Tsai, CEO of 500 Startups, has said ESG should be implemented early on in start-ups. ESG-led strategies are more effective compared to strategies that try to introduce ESG as an after-thought. CEOs and investors are making the change and for a start-up or business to secure that interest or investment, serious ESG commitments should be made.
ESG-backed measures can also deliver substantial savings to organisations. Reports by McKinsey discovered that businesses could save money by using ESG frameworks when tackling rising costs of business.
Executing ESG effectively can help combat rising operating expenses (such as raw-material costs and the true cost of water or carbon), which McKinsey research has found can affect operating profits by as much as 60 percent.
We’ve already explored the value of having ethical supply chains over unethical, unsustainable options in this blog post and highlighted the case of PepsiCo, who, in 2010, saved $60m through energy assessments and carbon management solutions that placed ESG at the heart of the change.
Happier, Stronger Workforces
When an organisation maps out all aspects of business strategy and management with ESG frameworks, employees and third party workforces enjoy the benefits too. Employee turnover is costly and so employee retention can become a frustrating challenge for some organisations. Where an organisation can consider social and governance factors in their business, they are more likely to uncover the source of employee departure. It could be inadequate pay rates, income inequality, toxic individuals, or misaligned employee/employer purposes.
In the case of employees who aren't aligned with the organisation's purpose, this can actually have a significant impact on people costs. Employees who don’t know what the bigger picture is or don’t agree with the organisation’s aims or values are more likely to leave quicker.
Where employees feel like they belong in an organisation, data shows that organisations benefit in bottom line growth and see a 56% increase in job performance. It’s important to note that both Gen Z and Millennials hold clear views on issues such as social inequality, environmental protection, and sustainability. Millennials are 40% more likely to join an organisation if they feel that the organisation performed well on sustainability. They are also 70% more likely to commit to their employment at the organisation if they feel that the business has a good sustainability plan in place.
More Resilient Businesses
Covid, recessions, technology, and social progression; four factors that can be deadly to business. Risk mitigation is a fact of any enterprise, and now ESG offers an approach that reduces the risk of harm to organisations through reputational ruin. Everything from good governance practices to kind social policy and respectful environmental consideration builds a picture of good business that consumers prefer to support. Start-ups are particularly vulnerable to mismanaging ESG commitments and falling short of society’s expectations. In business, reputation is key and whilst larger organisations might have the savings to recover from poor marketing campaigns and governance grievances, start-ups don’t have those resources. All businesses are at risk of unpopularity through poor choices by the leadership team. ESG offers a framework to reduce and mitigate those risks.
Incorporation of ESG Criteria into Businesses
It’s never too late to adopt an ESG framework and it’s not impossible to make the changes either. Some organisations will find that traditional values and processes mean that ESG-led change is met with refusal and the business offers nothing but rigidity on their position. All is not lost. This simplified list is a good place to start:
- Understand the ESG framework and how it affects your business
- Map out your current strengths that align with the ESG framework
- Plan out key goals to bring your ESG commitments to the forefront of your business strategies
- Communicate these goals to your community of stakeholders including employees, customers, shareholders and suppliers
Organisations Can Thrive with Great ESG-backed Policies
It’s exciting to see growth in any business, but especially where the growth is sustainable and has lasting positive effects in so many ways. Data consistently shows a move by business leaders, investors, and consumers towards more responsible, ethical, and inclusive business strategies that place ESG commitments at the core of business. There really is no time like the present to embrace change and take steps towards better business practices.