One of the things that the COVID-19 pandemic has accelerated on the planet is conscious consumerism, and a large percentage of companies are responding by announcing carbon-neutral or net-zero commitments. The growing awareness and demand for responsible action among consumers have made the adoption of environmental, social and governance (ESG) criteria more crucial than any other time in the past.
ESG criteria is a set of standards used by stakeholders to assess how responsible and sustainable an enterprise or company is. From customers to investors, the criteria have become the ultimate determinant of whether to associate with your company or walk away for investors, customers and other corporate stakeholders. To win more stakeholders’ support, this post is your comprehensive guide to environmental, social and governance (ESG) criteria.
Keep reading to learn more about the importance of ESG criteria and sustainability reporting for better business performance at all levels.
How Does ESG Criteria Work?
Recently, investors have demonstrated their interest in putting their funds or investments where they are assured of more value. Indeed, many investors are enriching their investing strategies with ESG criteria to ensure they are able to reap maximum benefits both in the short and long term. ESG criteria can be broken down into three: environmental, social, and governance.
Environmental, or "E" in ESG, focuses on the impact of resource use in a company on the environment. It is the most visible criteria and includes things such as waste discharge, carbon footprint, and other environment-impacting activities. The criteria also factor in the environmental risks faced by a company and how it manages them.
According to the United Nations Secretary-General, Antonio Guterrez, human activities are the main causes of environmental damage or impact, especially global warming and climate change. Therefore, he calls for a total shift from fossil fuels and coal before greenhouse gasses (GHG) can completely destroy the planet.
This is one of the reasons why the environment has become an important criterion when evaluating the companies to work with at the local and global levels.
This criterion is focused on establishing the relationship that a company has with different stakeholders. It looks at how your company treats people and targets determining whether your workplace is diverse and employees provided with the right working conditions. Stakeholders want to know how the company is impacting the community around, perhaps through social justice and empowerment programs.
Note that even the socially-related projects that you might be supporting abroad count because they also help to address ESG risks and issues.
Governance criteria explore how companies police themselves in different areas, especially in management and financial-related areas. The aim is to ensure that your company is governed responsibly for higher productivity. Under this criterion, stakeholders are interested in determining the company’s tax strategy, board’s focus on anti-corruption, board structure & diversity, and executive remuneration.
Is your company responsible and sustainable at the highest level of board, department, and team management levels? How does governance impact the performance of the company?
Why ESG Criteria is Important Now More than Ever
Over the years, unforeseen threats and risks have struck and caused huge devastations to businesses. During the recent COVID-19 pandemic, the destruction was enormous, as businesses closed down and millions of people lost livelihood. This is only one risk. Others might include natural disasters, policy changes, civil unrest, and management changes. If your company is not prepared well, the chances are that it will not weather these storms.
ESG criteria were designed to help companies rethink their design, structures, and operating models. Instead of waiting for these risks, which will no doubt come at some point, ESG makes it possible to imagine them and prepare. For example, the Hong Kong Stock Exchange (HKEX) requires companies to carry out comprehensive reviews to pre-identify possible risks and craft strategies for addressing them. This is what investors want to hear because they know their funds, investments or assets with an ESG-focused firm are safe.
The preference for sustainable investment saw ESG-focused funds jump from US$21.4 billion to US$51.1 billion in the United States alone.
In Asia (excluding Japan), sustainable fund assets increased by about three times to US$36.7 billion in the first quarter of 2021.
Here are other benefits to expect from your focus on ESG sustainability:
- Lower cost of business operations.
- Better stakeholder engagement.
- Stronger brand image.
- Higher sales and profitability.
- Enhanced production efficiency.
How to Improve Your ESG Performance
Now that you have the three ESG criteria for business, the next big question is, "how do you improve your company's focus on sustainability?" We must say that there is no shortcut here. The best approach is rethinking the company's operating design and ingraining sustainability factors at all levels. Here are some useful tips that you should consider:
Identify ESG Risks and Opportunities
One fact about ESG criteria in business is that you cannot improve what is unknown. Therefore, you need to make company reviews part of the ESG strategy. By analyzing the company’s operations, you are able to note all the challenges and adopt eco-friendly remedies. For example, “is the high carbon footprint being caused by the production machinery or shipment?”
Involve the Targeted Stakeholders
When stakeholders use ESG criteria or read through sustainability reports, they are interested in seeing specific actions depending on the nature of the company. Therefore, you need to involve them and ask what they want. For a company that deals with jungle tours, stakeholders might want to see greater commitment to promoting species diversity.
However, investors in a medical-based company might recommend some donations or funds in medical support to less privileged populations.
Work with an Agency of Experts
If you are new to ESG, the whole idea of sustainability can be pretty complex. Even with the right understanding of the concept, implementing ESG strategies can be challenging because of busy schedules and the huge amount of data to be analyzed. The best way to get it right with your ESG sustainability efforts is by working with experts. At Diginex.com, we have professionals with years of experience and are waiting to hold your hands in the ESG sustainability reporting and guarantee success.
ESG criteria are expected to become even more important in the corporate world, and it is crucial for you to get sustainability right. Diginex.com has stood out for its exemplary focus to help managers and entrepreneurs get everything right on sustainability. In addition to offering ESG consulting, we also have the best ESG sustainability reporting software for companies. The app helps to ensure you gather data on sustainability efforts, analyze it correctly, and prepare accurate reports for your stakeholders.
Talk to us today to learn more about ESG criteria, reporting, and how to get more from the process.