ESG stands for Environmental, Social and Governance. ESG is a sustainable investment tool used to evaluate companies by taking into account not only their financial returns, but also, and above all, their social responsibilities.
Table of contents
ESG definition
The definition of ESG is based on 3 dimensions, also known as ESG criteria:
- Environmental: this refers to the impact a company has on the environment, such as CO₂ emissions, recycling and waste disposal practices, the use of renewable energy, the safeguarding of biodiversity and nature conservation, animal treatment, and deforestation
- Social: the company’s social impact through the employment of minorities and people with disabilities, practices and services for employee well-being, fair employee pay, and the relationship between the company and the local community
- Governance: this concerns how a company is managed, for example the quality of relationships between executives, employees and various service providers, the fight against corruption, the implementation of accurate and transparent accounting methods, and employee training
What is an ESG investment?
ESG investing is a sustainable strategy that benefits companies and investors by promoting positive social impact. It takes into account issues such as the environment and human well-being, corporate responsibility, and long-term financial performance.
Although ESG is the evolution of the concept of Corporate Social Responsibility (CSR), there are some differences between the two. In fact, ESG metrics are more explicit and better incorporated into broader sustainability frameworks.
While the main arguments used by CSR to convince stakeholders to adopt sustainability practices focused on reducing company costs, ESG acts as a strategic lever to create new growth opportunities and improve performance.
Therefore, there has been steady growth in ESG investments in companies because investors are looking for opportunities that support and promote sustainability.
The benefits of ESG for companies
There are many benefits to implementing ESG for companies. According to a BlackRock study, 81% of a globally representative selection of purpose-driven ESG companies with better investment profiles outperformed their counterparts in 2020, despite the market downturn.
Nowadays, more and more investors are attracted to the values of companies that drive positive change, because today’s consumption is becoming more responsible.
The integration of ESG policies, in fact, makes customers, suppliers and other collaborators feel more emotionally connected to the company. McKinsey research has shown that customers are even willing to pay more to go green.
In general, ESG implementation has a positive impact on companies’ cash flows in 5 important ways:
- facilitating top-line growth
- reducing costs
- minimizing regulatory and legal interventions
- increasing employee productivity
- optimizing investment and capital expenditure
It also gives ESG companies a long-term competitive advantage. For example, when companies pay attention to customer privacy and security or promote workplace diversity as a driver of innovation, they create a positive image appreciated by all stakeholders.
This increases customer and employee loyalty, and overall performance is positively affected.
ESG and SDGs: what is the connection?
The ESG strategy focuses mainly on the business community and companies, while SDGs, which stands for Sustainable Development Goals, is a broader term that includes more stakeholders. United Nations (UN) members adopted the SDGs as part of the 2030 Agenda for sustainable development growth.
The SDG goals cover all of today’s challenges facing humanity, with the overall aim of achieving a more sustainable, healthy and fair global system for everyone.
Both ESG and SDGs offer concrete solutions to environmental and social issues, shifting the focus away from short-term shareholder profits alone and striving to create long-term value for everyone.
How to set up an ESG strategy?
The ESG implementation guide offers perspectives, guidelines and practical tools for companies to launch ESG. Here are the 5 main steps to start implementing an ESG strategy:
Step 1: Conduct a readiness assessment
Members of the management team should identify key long-term ESG risks and opportunities, investors and/or stakeholders, and all existing risk management and/or disclosure practices.
Step 2: Establish a governance structure
Companies that want to implement an ESG strategy must establish decision-making rights, responsibilities and oversight, which must report periodically on their activities to the company’s board of directors.
This work is more effective if supervised by a disclosure committee, but ultimately each company must make its own decision on how to structure this work.
Step 3: Take inventory and assess data collection and management practices
Quality, detailed investment data, collected from the outset, are essential for decision-making. To proceed, it is necessary to:
- Generate a complete inventory of the company’s internal efforts
- Develop an ESG rating and data framework to acquire, collect and track relevant data, regardless of whether the company discloses such information
- Implement appropriate protocols to ensure that data are reportable, repeatable and verifiable for the ESG strategy
Step 4: Decide what to disclose
Companies must identify which data points, events, objectives or results to disclose. It is best to focus disclosure on stakeholder topics, particularly investors, as they relate to long-term capital creation.
Step 5: Determine ESG communication and reporting channels
Finally, it is time to choose the communication channels to reach your audience:
- Consider creating a dedicated ESG report or a specific landing page to maximize disclosure online and increase the likelihood that it will be read by the public
- Determine whether the company will create an integrated report that combines ESG factors with financial performance
- Leverage the company website and social media features to strengthen the sustainability narrative
How to start an ESG strategy supported by WildSteps?
WildSteps is an innovative startup that supports companies in creating and implementing a sustainable brand, acting on employee well-being, conserving and protecting the environment, and engaging with local communities.
So, how does WildSteps help companies incorporate an ESG strategy?
- Practicing outdoor sports with your team: a great way to develop stronger relationships between managers and employees, maintain teams’ physical and mental well-being, and also strengthen relationships between the company and the local community.
- Investing in citizen science: taking positive action on biodiversity and nature conservation to have an impact on the local environment. The data collected and monitoring experiences are shared with researchers, helping strengthen ocean literacy.
- Involving your team’s activities in nature-based solutions: you increase your employees’ well-being and give them the opportunity to feel useful by protecting or restoring the local ecosystem. This will make them even prouder to work for the company.