Most business has environmental, social and governance (ESG) concerns and a strong position creates value. This article defines the ESG criteria and summarises a white paper published by McKinsey & Company that discusses five ways that adhering to ESG criteria adds value.
Investors and governments and multinational firms across the globe are increasingly demanding organisations to outline their ESG framework and approach in order to assess the organisation’s long-term sustainability. ESG has a potentially significant impact on the long-term success of your organisation by enhancing its corporate reputation and license to operate, making it easier to accomplish your business objectives and respond to crisis scenarios with key stakeholder groups.
Adhering to ESG criteria can also assist with the identification of immediate and long-term risks. It helps with managing future opportunities because shifting market and non-market conditions can expose unmet needs for new products and/or services, potential customer bases, and potential strategic relationships for addressing ESG issues.
Finally, ESG maturity is an indicator of a company’s commitment to building a high performing, purpose-driven workforce and inclusive culture. However, your organisation is unlikely to meet all the ESG criteria right away, but this article will help to guide you on your way.
Let’s start by defining ESG.
E = Environmental
Environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. It encompasses carbon emissions and climate change and how your company uses energy and resource. The criteria also evaluate any environmental risks your company might face and how the company is managing those risks.
For example, there might be issues related to ownership of contaminated land, disposal of hazardous waste, management of toxic emissions, or compliance with government environmental regulations.
There are several environmental factors to consider when adhering to ESG criteria including:
- Climate Change – What are your strategy and metric targets and how will you get to net-zero by 2050?
- Land Use and Ecological Sensitivity – What is the overall area of land that you use and the annual change in the area you use? Are there any threatened species in the areas that you use?
- Air and Water Pollution – Are you introducing harmful materials into the environment?
- Biodiversity – Each species has an important role to play and greater species diversity ensures natural sustainability for all life forms.
- Deforestation – Clearing flora, negatively affects natural ecosystems, biodiversity and the climate.
- Energy Efficiency – Are you eliminating energy waste by using less energy to perform the same task?
- Water Management – Are you using water efficiently and controlling the movement of water to minimise damage to life and property?
- Fresh Water Availability – Is fresh water available in water-stressed areas?
This guide is helpful to SMEs to understand how they can reduce their carbon footprint.
S = Social
Social criteria look at the company’s business relationships. It addresses the relationships your company has and the reputation it fosters with people and institutions in the communities where you do business.
For example, do you work with suppliers that hold the same values? Does the company donate a percentage of its profits to the local community or encourage employees to perform volunteer work? Do the company’s working conditions show high regard for your employees’ health and safety? Are other stakeholders’ interests taken into account?
There are several social factors to consider when adhering to ESG criteria including:
- Customer Satisfaction – Are your practices innovative to produce better products and services?
- Data Protection and Privacy – What’s your cyber security like? Are you protected from external attackers and malicious insiders? Data privacy governs how data is collected, shared and used.
- Diversity and Inclusion – You need to ensure gender pay equality, including for minorities and LGBTQ+ employees. You should track the percentage of employees per employee category, by age group, gender and other indicators of diversity and track wage level parity.
- Employee Engagement – Track and record the training you provide to your employees.
- Health and Safety – Track your total recordable injury rate (TRIR) and your absentee rate.
- Community Engagement – What is your level of investment in your community? If you are operating in multiple countries you also need to ensure robust country by country tax reporting.
- Human Rights – You need to determine the risk of child, forced, or compulsory labour in your contracting supply chains.
- Wealth Creation and Employment – There are 3 areas to record: the net number of jobs created, your net economic contribution and net investment.
G = Governance
Governance is 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.
For example, does your company use accurate and transparent accounting methods and are stockholders allowed to vote on important issues? Does your company use political contributions to obtain unduly favourable treatment? Or engage in illegal practices?
There are several governance factors to consider when adhering to ESG criteria including:
- Governing Purpose – Does your organisation have a stated purpose linked to social benefit and your core business?
- Quality of Governing Body – What is the composition of your highest governance body and its committees? List your executive or non‑executive members, their independence, tenure, their other significant positions and commitments, gender, the number of under‑represented social groups, and their competencies relating to economic, environmental and social topics and your stakeholder representation.
- Stakeholder Engagement – List the material topics identified in the process of defining your report content and how they impact stakeholders.
- Ethical Behaviour – What are your internal and external mechanisms for seeking advice about ethical and lawful behaviour, and organisational integrity; and reporting concerns about unethical or unlawful behaviour, and organisational integrity?
- Risk and Opportunity Oversight – How do you integrate risk and opportunity into your business processes? You need to clearly identify the principal risks facing your organisation specifically, the governing body’s appetite in respect of these risks, how these risks have moved over time, and the response to those changes.
- Bribery and Corruption – You need to know the total percentage of your governance body members, employees and business partners who have received training on the organisation’s anti‑corruption policies and procedures, broken down by region. The total number and nature of incidents of corruption confirmed during the current year but related to previous years. And the total number and nature of incidents of corruption confirmed during the current year, related to this year.
- Executive Compensation – What incentives do you provide to senior executives to enhance company performance relative to prior years and relative to its competitors for the benefit of all shareholders?
- Lobbying – Does your company influence or attempt to influence legislative action or non-action through oral or written communication?
Read our article, Do OHS Professionals Act As Moral Agents?
ESG and Value Creation
McKinsey & Company suggest that adhering to ESG criteria helps to create value in 5 sustainability areas.
When your company has a strong ESG proposition you are more likely to attract customers with more sustainable products, and achieve better access to resources through stronger community and government relations. When governing authorities trust companies, they are more likely to award them the access, approvals, and licenses that afford fresh opportunities for growth. McKinsey & Company found that 70% of consumers surveyed on purchases of multiple industries including the automotive, building, electronics, and packaging categories, said they would pay an additional 5% for a green product if it met the same performance standards as a nongreen alternative.
Investing in ESG leads to lower energy consumption and reduces water intake. Executing ESG effectively can help combat rising operating expenses, for example, raw-material costs and the true cost of water or carbon. There is a significant correlation between resource efficiency and financial performance.
Regulatory and Legal Interventions
Strong ESG helps your company to achieve greater strategic freedom, easing regulatory pressure. Your company can also earn subsidies and government support, rather than incur fines, penalties and enforcement actions. McKinsey & Company have found that typically one-third of corporate profits are at risk from state intervention.
When you use ESG criteria you are likely to boost employee motivation, which in turn leads to increased productivity. You will also attract talent through greater social credibility. Having a strong purpose helps when labour markets are tight. Employees with a sense not just of satisfaction but also of connection perform better. The stronger an employee’s perception of impact on the beneficiaries of their work, the greater the employee’s motivation to act in a “prosocial” way. Positive social impact correlates with higher job satisfaction. Weak ESG propositions can lead to strikes, worker slowdowns, other labour actions within your organisation, interruptions in supply chains and oversight of worker health and safety.
Investment and Asset Optimisation
Strong ESG criteria enhance investment returns by better allocating capital for the long term, for example, purchasing more sustainable plant and equipment using renewables and promoting waste reduction. They also avoid risks associated with investments that create longer-term environmental issues. When it comes to ESG, it’s important to bear in mind that a do-nothing approach is usually an eroding line. Continuing to rely on energy-hungry plants and equipment, for example, can drain cash going forward.
ESG Training to Increase Sustainability
To begin your journey in adhering to ESG criteria, training has a pivotal part to play. Leaders and Managers need to be aware of their ESG responsibilities so that they understand their role in the long-term sustainability of your company. And, all employees should be trained in sustainable practices.
Training records must be kept and are evidence of employee engagement. However, training costs in both time and money, and you should be realistic in what you can do in this space, with the budgets you have available.
This is where online training, using techniques such as microlearning, can really help because they are both cost and time efficient.
The Tap into Safety Integrated eLearning Platform provides quality ESG training online and on mobile. The Platform has 110+ training courses for safety, mental health literacy, leadership, governance and compliance, use microlearning, have a robust assessment, and comprehensive reporting. As a client, you have access to the entire training library to use what you want when you want.
Also, anything on the platform can be modified to suit your needs, we can write custom courses, and we can even upload your videos and help create your assessments. And we have great features such as assigning courses, setting pass rates and getting results back into your LMS.
Why not try a free trial to get a sample of what we offer?