Modern investors are not just looking at an investment’s potential returns, but also at the sustainability and ethical contribution the company makes.
The environmental, Social, and Governance (ESG) concept has quickly become a key factor when screening potential investments. Basically, the ESG framework is designed to help investors and other stakeholders understand how a company is managing its impact on the environment and society.
So, whether you are an investor, consumer, or business, understanding corporate ESG is very important. In this article, we cover five key points that will help you grasp corporate ESG and why it is valuable.
1. ESG Measures Company Performance in Three Key Areas
The ESG framework assesses a company’s environmental, social, and governance performance and then assigns it a score. The environmental factors involve a company’s impact on the natural world. Think waste management, energy efficiency, carbon emission, etc.
The social aspect covers how a company interacts with customers, employees, suppliers, and the community. Social issues can include diversity and inclusion in the workplace, corporate responsibility, labor practices, and so on. Last is governance, which measures a company’s business practices and management structure. Basically, how accountable and transparent is the company at the management level?
2. Corporate ESG Helps Companies Manage Risks
One of the biggest benefits of understanding corporate ESG for businesses is that it helps to manage risks and take advantage of opportunities. The current business space is rapidly changing thanks to customers, investors, and even employees waking up to the importance of sustainable and ethical operations in the business world. In the near future, companies prioritizing ESG factors in their strategy will be more equipped to adapt to the business environment.
3. Increases Customer & Employee Retention
On top of adjusting to the rapidly-evolving business environment, companies that implement ESG criteria in their operations will be more likely to not only attract customers and skilled employees but retain them too.
That’s because sustainability and ethicality are becoming important considerations in buying decisions for customers, who now seek products and services from brands that align with their beliefs. The same goes for sought-after talent.
4.Corporate ESG Plays a Role in Companies’ Long-Term Success
The ESG concept started with investors looking to make a more positive impact on the planet. Today, ESG criteria have grown even more in the investment world. So much so that we now have ESG ETFs and mutual funds. Investors have realized ESG is not just about contributing to a cause one is passionate about but it can actually dictate the long-term viability of an investment.
5. There Are Still Associated Challenges and Risks
While ESG is, without a doubt, beneficial to businesses of all sizes, the implementation doesn’t come without challenges. After all, the space is still in its formative years. There is implementation, regulatory, and financial risks involved, especially if a company underestimates what is needed.
Understanding Corporate ESG and Its Future Will Help You Make Better Decisions for Your Business or Portfolio
Corporate ESG is not a new concept per se. However, it has gained significant traction in recent years. As a business or investor, you want to understand what ESG is and why it is important to guarantee great financial performance for yourself while positively impacting the world.