The Next Big Development for Businesses

BrandPost
Jan 31, 2022
IT Governance Frameworks
Credit: Getty

A quick Google search for “ESG” yields 349 million results in under a second. Specify the search term to “environmental social and governance – ESG,” and you’ll find yourself with over 29 million websites to browse through.

The prevalence of ESG on the web is no fluke. It has quickly become one of the hottest trends in the corporate world today, emerging as an imperative that no business can ignore. In fact, a report last year found that Australia leads the way with ESG-related pay. 81 per cent of ASX 100 companies have incorporated ESG metrics into their CEO’s remuneration, and at least half of all Australian companies, in all sectors, have incorporated ESG measures.

BlackRock, an investment firm that has become a leading voice in ESG, provides a direct definition of ESG.

“ESG integration is the practice of incorporating ESG information into investment decisions to help enhance risk-adjusted returns, regardless of whether a strategy has a sustainable mandate,” the company states on its website.

Not only has ESG become well-known within the risk management industry, but it’s evolved to be one of the major considerations for investors and stakeholders, including employees, partners, and potential customers. Most organisations also realise that good governance, as it relates to one’s environmental and social impact, fosters trust and transparency. Because of this, investors and asset managers alike are looking for businesses with sound ESG management programs that result in clear metrics. For example, in 2021, National Australia Bank (NAB) announced that it had executed its first Australian ESG-linked derivative with Ramsay Health Care.  ANZ, meanwhile, has become a signatory to the Glasgow Financial Alliance for New Zero, a group of 450 banks, insurers and fund managers from around the world that have agreed to a net zero commitment.

If you are ready to get started with developing and implementing an effective ESG plan – and you should be – here are three things you should consider:

  1. Impact Of Your Employees

GRESB, which “provides financial markets with actionable insights, ESG data and benchmarks,” points out that in the wake of the COVD-19 pandemic, certain social factors became more important within businesses than ever before as well. These include “evolving societal expectations associated with the growing inequality between wealth and poverty, access to affordable housing, connection to nature, the gender and diversity gap, and an increase in mental illness.” With companies focusing more prominently on these social factors, it directly correlates to improved employee happiness, and in turn, better relations between board members and those that work at the company. At the end of the day, any company with happier, more productive workers is destined to perform better on all levels.

  • Your Board Will Reward You

Although corporations have long been interested in how culture is driving a measurable change, the ESG wave is now truly taking over boardroom discussions. A recent article published in Corporate Secretary revealed that “companies without any ESG expertise at the board level tend to underperform on sustainability compared with those that do have ESG.”

The change is two-sided, though. While organisations have become more intrigued by ESG factors, this comes simultaneously as climate and social responsibility regulations have come to the forefront after being mostly unaddressed until the 21st century. According to the KPMG Survey of Sustainability Reporting 2020, a mere 12 per cent of companies published sustainability reports in 1993. At the time of this survey in 2020, that number had drastically increased; today, over 80 per cent of companies publish a sustainability report.

This shift toward climate sustainability reporting has even been evident within the past several years. The financial industry saw a five per cent uptick in such reporting, from 2017 to 2020, according to that same KPMG report.

As the data shows, ESG is moving from simply an option to a necessity for all businesses. Amongst boards, ESG has made its presence known as well. As highlighted above, Australian corporations have recently begun tying executive compensation to an organization’s ESG metrics. Put simply, those that are discussing ESG in the boardroom will see a pay raise if they can capitalise on their organisation’s ESG strategy.

  •  Preexisting Data Points

To get started, you should look for a solution that allows you to manage the data you already have. Also, be aware to align structured and unstructured data across multiple parts of an organisation. A great example of this is within the “environmental” category, which encompasses company energy use, carbon emissions, and electric-saving practices, among other measures. While measuring an organisation’s carbon footprint may seem relatively straightforward, it requires looking at various areas where carbon is used. This can include energy consumed in the organisation’s buildings, manufacturing costs and methods, and the costs and methods of commuting.

The rise of ESG has not only become noticeable, but it has taken over daily discussions in the world’s largest companies. As the world continues to change, ESG will only continue to grow.

The numbers are there, and the data tells a story that has become far too compelling to ignore: ESG is here to stay. Now, it’s up to businesses to take these raw numbers and translate them into an effective plan that allows those businesses to soar; in turn, they will have the right toolset to manage, embrace, and ultimately thrive on risk.