Environmental, Social and Governance (ESG) matters touch every aspect of the business, but they also reach beyond the individual organization. Between the impacts of third-party suppliers on communities and the environment, and the risks (and benefits) they bring to the business, ESG should be top-of-mind for business leaders.
However, though ESG has grown in importance and evolved over the years, it is still considered “nice to have” for many companies. ESG disclosure regulations and metrics are yet to be codified into law in the United States and many countries around the world, and because of this some organizations opt out of measuring and disclosing this important information. But the tide is shifting, and forward-thinking organizations have already started acting on these matters – and those that haven’t should start thinking for the future, because ESG is primed to be a “need to have”, financially material business strategy in the coming years.
ESG "Nice to Have" History
Historically, Corporate Social Responsibility (CSR), Sustainability and ESG have been considered a “nice to have”. Not being considered a necessity for the business created a challenge for corporate champions and advocates of these key initiatives to secure budget, resources and buy-in from C-level and Board of Directors. Companies didn’t see the value of investment required to impact change because it didn’t result in revenue growth. Many were just checking boxes to appease customers and employees – which ended up contributing to the “greenwashing” phenomenon. Greenwashing is when companies market efforts, but don’t deliver results consistent with their commitments or corporate goals.
The industry was ripe to incorporate Sarbanes-Oxley (SOX) regulations around CSR and Sustainability efforts, however the political and corporate appetite wasn’t ready to take on this challenge – regardless of the political party in place. As the pandemic and our political environments became unsettled, ESG concerns were raised by key stakeholders around the globe leading to new global regulations, and the Security Exchange Commission (SEC) moved to implement ESG disclosure regulations in the United States.
The writing is on the wall – companies must act now to move away from the idea of a “nice to have” initiative, to a “need to have” where regulatory requirements are making their way into mainstream.
ESG Moves to a “Need to Have"
In order for ESG to be prioritized as a “need to have” effort, there needs to be global adoption. The good news is many leading companies haven’t waited for government regulations to dictate whether they should incorporate a strategy for ESG, they’ve been moving on it for years. The only difference is that it was defined as CSR or Sustainability, focused on reporting and transparency across environmental and social concerns. The output has typically been in the form of a report posted on corporate websites and/or by distributing PDF files to key stakeholders.
Many investors, like Blackrock and other Private Equity firms, mandate that companies report their ESG risk and performance through specific use of key ESG metrics. With the inception of the Sustainability Accounting Standards Board (SASB), now the Value Reporting Foundation, industry standards were created with investors in mind. This allows for quantitative insights into non-financial data which is material to a business. It also drives the need to have aspects of ESG disclosures by enhancing the CSR approach to mostly qualitative descriptions of the program, to a more metric based approach which allows companies to benchmark each other and drive towards industry goals.
Why ESG Matters Now – With or Without Regulation
Whether a company started in the 1990’s or the 2000’s, the CSR and environmental focus of companies were top of mind as some companies had to address environmental concerns such as contamination of our ground water, toxic release of chemicals, and how people were being treated within an organization and across their supply chain. As we look at 2022 and beyond, companies are now accepting ESG as a need to have to attract investors, customers and employees.
ESG matters are financially material to the business, especially with investor and consumer attention focused on how companies are doing business and reporting progress on ESG goals.
Though some of the initiatives falling under ESG may be considered qualitative, and therefore, lack a direct financial impact to the business, these metrics play a large role in investor, consumer and employee decision-making. Organizations that not only disclose ESG metrics and make meaningful progress are more attractive to the public and will be well suited to adhere to upcoming regulations.
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