What is ESG?

ESG is becoming a significant topic in the investing and corporate world and for a good reason. But what does ESG entail? How is it different from sustainability and Corporate Social Responsibility (CSR)? And in what ways is it valuable and material to my company?

ESG is an acronym for Environmental, Social, and Governance. As businesses strive to do more than just make a profit, the concept of Environmental, Social, and Governance (ESG) has emerged. This holistic approach takes into account the impact that businesses have on both people and the planet.

Environmental captures a company’s environmental performance and impact, which is mainly determined through a company’s greenhouse gas emissions, resource consumption, and general compliance with environmental regulations. It is mainly a framework that helps investors evaluate risk according to defined E, S, and G criteria that align with standardized global frameworks, such as the Sustainability Accounting Standards Board (SASB) or the Task Force on Climate-Related Financial Disclosures (TCFD).

The social aspect of ESG evaluates the impact a company has on its employees, customers, and the greater communities in which it operates. This is typically defined by a company’s commitment to Diversity, Equity, and Inclusion (DEI), marketing, community engagement, and supply chain.

Governance is determined by an organization’s leadership and structure, such as executive compensation, shareholder voting, company considerations when making business decisions, and general transparency and accountability to all relevant stakeholder groups.

When most individuals think of sustainability, they think of the environmental movement of 50 years ago. Just as business has evolved over the last 50 years, sustainability has too. Sustainability these days encompasses social and economic issues such as quality education and healthcare for all, reducing inequalities, and eliminating poverty. The United Nations defines sustainability as meeting the needs of the present without compromising the ability of future generations to meet their own needs.

Sustainability is a much broader concept that can take a multitude of forms based on the organization. It can be seen in the form of philanthropy, reducing waste/emissions/etc., and anything that would benefit society or the planet. ESG digs into the metrics and performance using global frameworks, such as the Sustainability Accounting Standards Board (SASB) or the Carbon Disclosure Project (CDP).

A great example to illustrate this is to look at an oil and gas company versus a company that produces all-electric vehicles. The oil and gas company may have a high ESG score but a low-impact business model. The electric car company has a good impact business model but might score very low on the ESG scale based on how they treat their employees, for example.

There are some frameworks, like B Corporation Certification, that take both performance metrics and impact into consideration™ when evaluating a company.

ESG reporting and frameworks help interested stakeholders understand an organization’s risk and opportunity management in these areas. The intention is to improve the business practices of a company while simultaneously boosting the company’s reputation with investors and customers. Especially during and after the tumultuous times of a global pandemic and following the economic downturn, investors tend to see companies who prioritize ESG as more resilient due to better long-term risk management.

There are infinite reasons ESG is valuable to an organization. First and foremost, companies have a moral obligation to uphold strong social values and a social conscience. More and more consumers and investors are scrutinizing organizations that behave antisocially or make empty promises, also known as greenwashing.

Besides that, prioritizing ESG can reduce costs, protect valuations, reduce regulatory infractions, and increase productivity. This is done through energy-efficiency and renewable energy strategies, staying compliant with all government regulations, attracting top talent, and decreasing employee turnover.

To reap these benefits, a company must determine what is relevant to its business success and what is important to its stakeholders. A materiality assessment is a formal process that considers an organization’s industry and size to identify environmental and social issues and informs stakeholders for strategic decision-making. It also identifies how financial targets and environmental and social performance overlap and what actions can be taken to improve both.

Sensiba offers three comprehensive ESG assessment options. Impakt IQ (IIQ), SASB and B Corp Certification™. Which one is suitable for your organization ultimately depends on your organization’s needs and goals. IIQ, SASB, and B Corp set baselines and benchmarks but vary in rigor, detail, and accountability. SASB is an introductory ESG assessment, IIQ is a moderate to rigorous evaluation, and B Corp offers a third-party certification of ESG scoring and impact business model performance.

The IIQ Assessment requires 7-9 C-suite leaders and takes about 3-4 months to produce a detailed, investor-grade framework that integrates ESG metrics into a company’s DNA. This assessment is appropriate for an organization that can invest significant human and financial capital toward holistic transformation from “business-as-usual.”

SASB takes 1-3 executives and about 6-8 weeks to produce the top 5-10 Key Performance Indicators (KPIs) and a high-level strategy and roadmap for the future.

B Corp Certification takes a single executive-level sponsor and about 1-1.5 years to complete the B Impact Assessment and proceed through verification for certification. Once complete, an organization will have an ESG-type score and an impact business model score. This route is appropriate for consumer-facing companies looking for a more purpose-driven business transformation.

By understanding what ESG is and its benefits, your company can make strides in becoming a leader in responsible business practices. Good environmental, social, and governance policies result in better risk management and improved relationships with investors, customers, and employees. A materiality assessment can help you identify which areas are most important for your company to focus on. For more information on how we can help you get started, contact us today.

Contact our team for more information about the Sensiba Center for Sustainability and how we can help you on your ESG journey.