What is ESG and Its Importance

ESG is the environmental, social and governance standards that businesses set to measure their corporate social responsibility (CSR) efforts. ESG benchmarks take companies CSR values and commitments one step further by setting up controls, measuring and reporting the sustainability and social impact of the enterprise.  

Environmental criteria are a company’s benchmark regarding its environmental impact and sustainability goals. This includes corporate policies around compliance with environmental regulations, greenhouse gas (GHG) emissions, pollution, waste production and resource usage.  

Understanding your environmental impact across your entire supply chain including your suppliers and sub-tier suppliers is the first step in this process. Setting up metrics and committing to sustainable practices such as the use of renewable energy, water conservation, reduction of carbon footprint, management of toxic waste and use of compliant raw material is the next step. Finally continual assessment is needed so you can measure your progress towards your goals.  

Social criteria are how a company treat people and their impact on society. This includes employee health, safety and working conditions such as child labor or slavery across your supply chain. Ethical practices, inclusion, diversity, fair pay, and community giving are few other examples of social criteria.  

Setting clear guidelines around these issues and holding your suppliers as well as employees responsible to these standards is even more important in this area. Commitment to measuring your progress through surveys and other metrics is key to this process.  

Governance criteria examines corporate transparency and polices around how a company governs itself. This includes issues such as companies tax strategy, executive pay and board structure.  

Setting up strong corporate governance policies such as anti-corruption and bribery, ensuring compliancy with government regulations and self-audits are important such practices. Holding all your stakeholders as well as suppliers responsible to the same standards is key to ensuring you meet these criteria.  

Why is ESG Important

ESG metrics bring visibility into a company’s ethical and sustainability practices. ESG also exposes any risks a company may face around these issues impacting your bottom-line and operations.  

These metrics have become increasingly important to socially conscious consumers and investors which is a direct impact to a company’s profitability.  

Consumer loyalty directly impacts revenue as consumer spending trend shows that they are increasingly seeking sustainable products and brands. According to Forbes, 64% of consumers reported in 2022 that they support socially responsible brands, and 36% reported that they will increase the amount they spend on sustainable goods and services.

Additionally, there is a rising trend in ESG investing. Socially conscious investors want to ensure their funds are creating positive impact on society and the companies they support are good corporate citizens. According to a report by Bloomberg Intelligence, global ESG assets may surpass $41 trillion in 2022 and $50 trillion by 2025.

There are operational and strategic benefits to incorporating ESG into your organization as well. These standards and practices help uncover any immediate or future risks to your organization. Ensuring you have visibility into your internal and external risk factors so you can streamline your operation and stay compliant with current or future government regulations.

ESG Challenges

Although ESG’s are beneficial to companies and society as a whole, organizations have a number of challenges in setting up, tracking, and reporting these initiatives.  

Although various groups such as the World Economic Forum are working together to create ESG standards, currently, there is no unified global criteria or framework businesses can work from. Adding to this complexity is that there is no standard accounting, audit or reporting structure that businesses can adhere to in this process.  

Due to a lack of auditing, certifications and clear transparency organizations can make false claims about their sustainable practices. This creates complications for the investment community, consumers as well as companies who are working to build true ESG initiatives.

Another big challenge to organizations as they begin setting up, measuring, and reporting their ESG plan is data. For example, having access to data on supplier environmental, ethical, and business practices is imperative to developing and managing your organization ESG as well as mitigating any potential ESG risks.  

Get started on incorporating ESG into your organization by understanding your supply chain risks from design to delivery.