Originally ESG standards were introduced as a corporate social responsibility initiative by the United Nations and now it is a globally recognized phenomenon. Today ESG is recognized worldwide and helps both investors and individuals identify companies that align with their values and care about the overall environment of the workforce. Applying the ESG system into your company has a handful of benefits but understanding what it is is key to getting started and strengthening your business.
What is ESG? Why is it relevant to business?
ESG stands for environmental, social, and governance (ESG). It’s a set of standards for a company’s behavior utilized by socially aware investors to shroud potential investments. Now more than ever candidates and investors seek (trade) opportunities that align with their values. ESG represents as a guideline for firms to act responsibly and ethically. The three characteristics are intertwined.
What does each category mean?
Encompasses carbon emissions, waste, energy and resources needed for the business to run. For example: Carbon emissions, air and water pollution, waste management and green energy initiatives.
Encompasses relationships and reputation that the company has with people, institutions and communities they work with for example: fair labor practices, data security, employee gender ,diversity and customer satisfaction.
Encompasses the internal system of practices, controls, and procedures your company adopts in order to govern itself, make effective decisions, comply with the law, and meet the needs of external stakeholders. Every company, which is itself a legal creation, requires governance.” for example: diversity of board members, executive pay, internal corruption and large-scale lawsuits.
How does it work?
ESG scores are generated by rating platforms where analysts evaluate corporate disclosures, conduct management interviews, and review publicly available information about an organization to provide an objective rating of the organization’s performance. When company management teams disclose ESG information without the use of an appropriate framework, it’s often referred to as Greenwashing, which consists in putting forward ecological arguments in order to forge an ecologically responsible image among the public when in reality that is not the case or is exaggerating.
What is the difference between ESG and sustainability?
- ESG looks at how the world impacts a company or investment, whereas sustainability focuses on how a company (or investment) impacts the world
- ESG is about company stakeholders, identity, and decision-making — the board, CEO, employees, shareholders, and other stakeholders — whereas sustainability is about the relationship between a company and the environment
- ESG includes sustainability into its three pillars, but incorporates a broader social and corporate governance considerations
Is one better than the other?
ESG is typically more relevant for large companies who are listed on public investment exchanges or who need financing from institutional investors. However, as more banks and financial services firms themselves adopt ESG principles around their business, ESG is also increasingly becoming more material to startups and smaller organizations.
Why are they relevant to business? What benefits does it have?
Incorporating ESG can help in reducing risk and lowering costs to improve reputation and attract new customers, candidates and acquire/ retain talent by matching their values long term. In addition, in today’s talent market, candidates attach more importance to a company’s values. Inclusion of ESGs can therefore also be important to attract the best talent.
Five ways that ESG creates value – McKinsey & Company
Statistics that support the benefits of ESG
- Organizations with the highest employee satisfaction had ESG scores 14% higher than the global average, likely due to their strong environmental performance [Marsh & McLennan]
- By 2029, the Millennial and Gen Z generations will make up 72 percent of the world’s workforce, compared to 52 percent in 2019. These generations place greater importance on environmental and social concerns than their predecessors do – and will expect more from employers on these issues
- New research shows that nearly two in five (38%) employees would look for a new role if they thought their employer was not doing enough on ESG issues.
- More than one in four S&P 500 companies that conducted earnings calls for Q4 2020 cited “ESG”. This represents a 63% increase in ESG mentions from the previous quarter, and the highest number of ESG mentions in the last ten years. [FactSet]
- 80% of the world’s largest companies are reporting exposure to physical or market transition risks associated with climate change [S&P Global Market Intelligence]
- 76% of consumers say they will stop buying from companies that treat the environment, employees, or the community in which they operate poorly [PwC]
- ESG strategies can affect operating profits by as much as 60% [McKinsey]
You may have already applied the ESGs, be inspired to go that way now or not do so but commit to sustainability. Translating values and your company culture in an engaging way to attract the best talent can sometimes be difficult. With Kilpatrick’s 25+ years of experience, our experts understand what workers look for and value that transmits to their employment decisions. Get in touch now and we will deliver the candidates to you.
- Niemoller, J. (2022). 25 ESG statistics you need to know in 2022. Perillon.
- Henisz, W., Koller, T., & Nutall, R. (2019). Five ways that ESG creates value – McKinsey & Company.
- What is ESG? A guide for businesses. British Business Bank. (2022, October 6).
- Brightest. The difference between ESG and Sustainability: This Week in Sustainability. Brightest. Retrieved October 10, 2022
- Miller, N. (2022, August 31). ESG score. Corporate Finance Institute. Retrieved October 10, 2022
- Bailey, R., & Ferguson, A. (n.d.). ESG as a workforce strategy. Marsh McLennan. Retrieved October 11, 2022
- Greenwashing definition – what are the best examples of greenwashing? Youmatter. (n.d.). Retrieved October 11, 2022
- Brightest. (n.d.). The difference between ESG and Sustainability: This Week in Sustainability. Brightest. Retrieved October 11, 2022