Why you need to start paying attention to ESG

Beyond your mission statement, are there any environment, social or corporate governance (ESG) values that leadership cares about?

And what impact could making those values an active part of your policy and culture have on the bottom line?

What it stands for

Ways to show your firm cares about the “E” in ESG can include:

• working to slow climate change
• protecting natural resources
• reducing pollution and waste, or
• investing in ecology (e.g., cleaner energy sources).

“S” is for positive social change. For example:

• responsible supply chain sourcing (e.g., partnering with a supplier committed to shrinking its carbon footprint)
• increasing product safety and liability
• supporting quality education (e.g., sponsoring an afterschool reading program), or
• gender equality initiatives.

The “G” for governance addresses matters such as:

• accounting oversight practices
• establishing an audit committee
• a corporate code of ethics to prevent internal fraud
• tax transparency, and
• transparency for company political activities (e.g., lobbying, campaign contributions).

Why it matters

Defining ESG values isn’t just for nonprofits anymore. With climate change, social injustice and questionable business practices in the news, many firms have felt the need to tell their strategic partners what they’re doing about these issues.

According to Diane Wasser, managing partner of regions for Eisner Advisory Group, 90% of S&P 500 index companies have published sustainability or responsibility reports.

And in many cases, it’s feedback from current and future investors and customers that’s driving businesses to take stock of the standards they hold for themselves, said Danielle Barrs, director of ESG and sustainability solutions for consulting firm EisnerAmper.

Because these key stakeholders have access to a lot of info and data online, they’re asking questions. “That comes with increased public scrutiny,” she said. “That’s absolutely reasonable and valid to want honesty from the companies that (they’re) buying from and the companies whose services that (they’re) using.”

A survey from FINRA Investor Education Foundation and NORC at the University of Chicago found that more than half (57%) of retail investors feel that investing can be a way to make a positive change in the world. And most (77%) respondents said that if they made a “socially responsible” investment, they’d assume the company would at least somewhat share their personal values.

ESG and compliance

Fines for violating the Clean Air Act or Clean Water Act can be a blow to the bottom line. But it isn’t just the Environmental Protection Agency that’s watching how your business operations impact the planet.

An executive order from President Biden instructed federal agencies to review any regs that may be out of sync with the administration’s climate change and environmental goals.

As a result, the U.S. Securities and Exchange Commission has released a proposed rule that would require publicly traded companies to disclose climate-related info in their annual 10-K filings, namely:

1. management of climate-related risks, such as greenhouse gas emissions, and
2. how climate risks (e.g., severe weather events) could impact business operations or financial conditions.

So if you haven’t been paying attention to ESG’s “E,” you could be required to in the future. Stay tuned for developments at www.sec.gov.

Key impact areas

An ESG portfolio that demonstrates what your company’s doing to help make a difference can be a tool for attracting and retaining top talent.

Millennial and Gen Z workers are making career decisions based on what they perceive an employer’s philosophy to be. If your corporate values don’t align with their personal values, it could result in turnover or losing talent to the competition. Both are costly.

Also, showing that you care about ESG issues can help you retain vendors and suppliers seeking “greener” partnerships.

What to do next

A good first step is getting a feel for what your company’s already doing for ESG, then creating a risk profile and a strategy with reasonable goals.

“Find out what your baseline emissions are … what your current sustainability initiatives are … what your current policies are. You’d be surprised how many companies are doing things that you don’t realize count as ESG,” Barrs said.

When creating an ESG policy, environmental lawyer William “Buddy” Cox III of the Birmingham, AL, firm Bradley Arant Boult Cummings LLP said some good places to get ideas are:

• the U.N. Global Compact, and
• asking your employees what issues are important to them.

From there, finding something that a lot of employees are willing to support – fighting hunger, for example – is a good way to get the ball rolling.

“What does that support look like? Does it look like writing a check? Does it look like getting buy-in from the employees to do food drives?” Cox said.

In addition, it’s important to be able to present data and metrics that show you’re acting on the things you say you care about.

Cox advised appointing a sustainability officer to oversee your ESG practices and portfolio. That includes ensuring that company investments follow that policy.

But remember, “reporting and disclosing are the baseline. The end goal isn’t to report. The end goal is to improve – to have a more positive impact on the environment and the community,” Barrs said.