How ESG Can Make or Break Your Business in 2023: Forbes
As the world becomes more aware of the impact of business practices on the environment and society, a new "buzzword" has, according to Forbes, emerged in boardrooms around the globe: "ESG".
Short for Environmental, Social (and implicitly, 'Corporate') Governance, ESG frameworks demand that companies report on their non-financial risks and opportunities to minimise harm to stakeholders and the planet.
But ESG is not just a trendy topic for social media campaigns. It's a powerful tool that can attract or deter investors and customers, especially for younger generations.
In fact, a survey found that 72% of Millennials want to invest in brands that align with their values, and that 64% believe that ESG principles will become standard for all businesses in the future.
So, what exactly is ESG, and why should business leaders care?
The 3 pillars of ESG
The three pillars of Environmental, Social, Governance, are distinct, yet interrelated, and influencing one, will influence the other.
The environment affects society; society the environment; and the way that they are approached is the way that they are governed - and so on.
In other words, the most effective way to understands ESGs is as a holistic system, and procurement both feeds into, and is fed by the whole.
Environmental
Environmental criteria evaluate a company's commitment to preserving nature, from reducing carbon emissions to protecting biodiversity.
Social
Social criteria assess how a company treats its employees, customers and communities, from promoting diversity to preventing human rights abuses.
Governance
Governance criteria address how a company is managed and monitored, from ensuring transparency to respecting shareholder rights.
Good practice vs best practice: Beyond the ESG checklist
Forbes relates that ESG is more than a checklist of good practices. It's a way to answer the question, "What are we doing to improve the world and help society progress?"
For socially responsible investors, ESG has become a vital tool to identify which companies are worth the risk and which ones are engaged in unethical practices.
And the numbers speak for themselves: a McKinsey report found that global investment in sustainability exceeded US$30tn in 2019, and roughly 70% of studies identified a positive correlation between ESG and financial performance.
The challenges of ESG
However, ESG is not without challenges. One of the biggest criticisms is the lack of consistency and transparency in the rating system.
Different firms use different methodologies to score ESG performance, and the lack of standardisation can make it hard for companies to understand what constitutes "good" practice.
Moreover, some companies may engage in "greenwashing," i.e., making superficial or false claims about their sustainability efforts to appeal to consumers without truly committing to them.
But perhaps the biggest challenge for companies is to bridge the gap between ideation and implementation. It's not enough to have a nice-sounding ESG statement or policy.
Companies need to back it up with real action and tangible results.
Starbucks, for instance, faced criticism when it introduced strawless lids as part of its sustainability initiative - but still used plastic, which raised questions about the recycling system and the global plastic crisis.
Systematic implementation of ESG
To truly embrace ESG and reap its benefits, companies need to align their core values with their ESG goals and communicate them effectively both internally and externally.
This means conducting an audit of past and planned ESG measures, building messaging guidelines, and ensuring consistency across all communication channels.
In 2023, ESG can make or break your business as well as your procurement processes.
Will you rise to the challenge?
