Why are certain investments more successful than others? Why do some startups always seem to excel and get ahead of the pack? The answer is ESG. It doesn’t matter if you are an investor or a company, large or small, Environmental, Social, and Governance (ESG) reporting and investing are critical to keeping up with the current market.
In this sense, ESG is more than just a framework; it is also crucial for employees, regulators, and everyone else involved in the ecosystem. Why? Simply because events like the coronavirus outbreak and climate change remind us that we are not masters of our planet and have to be prepared for the unexpected.
Environmental: Environmental considerations include a company’s or government’s commitment to climate change through greenhouse gas emissions, as well as waste management and energy efficiency. With increased attempts to prevent global warming, reducing emissions and decarbonising has become more critical than ever. Companies that fail to consider these environmental risks may face unexpected financial risks as well as investor scrutiny.
Social: The social component looks at how a firm nurtures its people and culture, as well as how this affects the surrounding community. Inclusion, gender and diversity, employee engagement, satisfaction, data protection, privacy, community relations, human rights, and labour standards are all factors taken into account.
Governance: Governance takes into account a company’s internal system of controls, practices, and procedures, as well as how an organisation prevents violations. It ensures transparency and best practices in the industry as well as dialogue with regulators. The company’s leadership, board composition, executive compensation, audit committee structure, internal controls, shareholder rights, bribery and corruption, lobbying, political contributions, and whistleblower programmes are all taken into account.
In recent years, there has been a massive increase in ESG reporting. Many companies now include ESG reporting in their annual reports to demonstrate how sustainability is built into their operations.
How does ESG add value to an organisation?
For a few years now, sustainability in all its facets has become a trending topic across almost every growing sector, indicating that ESG is here to stay and will continue to be relevant for years to come. VCs and investors are becoming increasingly interested in how startups score on ESG policies and practices. Numerous scenarios may put pressure on your company to implement ESG. Imagine you are a startup founder looking for funding – you will have a better chance of convincing investors if your company has already implemented ESG policies and performs well on these factors.
It has been shown that companies that use ESG practices have higher financial growth and optimisation, lower volatility, higher employee productivity, lower regulatory and legal interventions (fines and sanctions), top-line growth, and cost reductions. Whereas companies that performed poorly on ESG very often experienced higher costs of capital and higher volatility due to controversies and other incidents such as labour strikes, fraud accounting, and other governance irregularities. So, if you don’t want to be left behind, ESG should definitely be on your mind!