The Importance of ESG in Today’s Business Landscape

Previously, the ASK GIA blog has discussed what ESG means. To give a bit of a recap, ESG stands for environmental, social and governance. They represent the three areas companies are supposed to report on in the fiscal evaluations of their companies. ESG investing first gained traction with the 2006 UN publication of its Principles for Responsible Investment called Who Cares Wins. The movement was an effort to create sustainable investments, for investors to maximize returns while creating long term social or environmental advantages.

These were proposed in combination with the understanding that combating climate change could not be mitigated solely by personal contributions and that businesses had a major impact on the environment – many major governing organizations understood that there needed to be a financial incentive for commercial businesses to adopt environmentally sustainable praxes.

ESG is important in today’s business landscape because it verifies the credibility and transparency of a company. The Morgan Stanley Institute for Sustainable Investing published a white paper in 2019 which compared sustainable funds with traditional funds between 2004 to 2018. The total profit of sustainable mutual and exchange-traded funds were similar to those of traditional funds. During times of market volatility, companies with ESG priorities had greater capabilities of bouncing back from economic downturn.

 

Companies that prioritize sustainability often exhibit consistent growth overtime. ESG investing and ESG principles can help in retaining employees too. The current demographics of the working public consist of millennials and Gen Z who place importance on the issues ESG encompasses. Many companies attempt to green wash their products and companies show their true commitment to sustainability by using the framework for ESG ratings and reports established by The US Securities and Exchange Commission (SEC) in May 2020.

For competitive reasons, the benefit of abiding by ESG values contributes to: risk mitigation, future proofing, more resilient supply chains, and increased marketing success. Businesses practicing ESG values are more likely to be in compliance with environmental legislation, leading to less fines or legal troubles. Businesses focused on sustainability values are able to future proof and more likely to create new business opportunities when they diverge from outdated business practices. Due to COVID, there has been instability in supply chains, practicing ESG values may mitigate this risk and allow businesses to find local, sustainable alternatives.

 

For cost effectiveness, companies practicing ESG values choose to proactively maintain industry compliance with current legislation instead of spending money to short cut around legislation. Short cuts done in this fashion are usually short sighted and costly. Companies could spend money to circumvent legislation and still need to pay necessary fines when they are found to be non compliant.

Rather than remaining entrenched against ESG values, companies may even attain higher net worth evaluations if ESG ratings are considered in the valuation process. ESG initiatives position businesses for long-term sustainability and operational efficiency. Adopting ESG values and practices may also benefit the business internally. Stakeholders are able to trust a business and develop positive relationships. Employees find fulfillment working for environmentally conscious businesses as well.

Lastly, and most importantly, ESG initiatives should be adopted because they contribute to a more positive environment. Companies profit off of the environment by mining materials and generating emissions with daily business processes. There must be a long term plan for a sustainable future. It is up to SW to fulfill our role and responsibility as credible, socially and environmentally sustainable business.