What Is ESG and Why It Matters for Your Business (+ Infographic)

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The Green Business Bureau’s ESG image infographic

The Green Business Bureau has created the below ESG image infographic to help you understand Environmental, Social and Governance (ESG) criteria, and how this criteria relates to corporate sustainability.

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What is ESG and why is it important for your business?

The initialism “ESG” stands for “Environmental, Social, and Governance”. Under each category there are a set of standards and goals an organization must meet to be compliant.

ESG has recently become a headline topic. Reports reveal that 87% of business leaders expect an increase in sustainability investments for their organizations over the next two years. The primary stakeholder groups creating this shift are customers, yet investors are not far behind. Over $500 billion flowed into ESG-integrated funds in 2021, which contributed to a 55% growth in assets under management in ESG-integrated products. ESG investment growth is expected to continue into 2022 and beyond.

Hence the role of ESG is pivotal in the future of our businesses. Which is exactly what our economy needs to help mitigate global issues such as climate change, and protect basic human rights.

ESG compliance is the new era of business – welcome!

With this in mind, in this Green Business Bureau article, we wanted to make it easy for business leaders like you to understand exactly what ESG is, and why ESG is important for the prosperity of your business. Think of this article as your short guide for understanding the basics of ESG and how ESG relates to corporate sustainability (supplemented by the ESG image above).

ESG image to understand how criteria relate to corporate sustainability

ESG lays out a set of guiding principles that help businesses make environmentally and socially conscious decisions. The three ESG categories – namely environment, social, and governance – correspond to the three pillars of a sustainable business model – namely the environmental pillar, the social pillar, and the economic pillar. However, ESG adds to the sustainable business model by specifying the standards to be met under each category. In other words, think of ESG as a action-oriented model for corporate sustainability.

Below we discuss the standards to be met under each category of ESG.

E: ENVIRONMENT

In our ESG infographic you can see that environmental criteria address a business’s impact on our natural world. This includes measures that work to reduce an entity’s carbon footprint, effectively manage waste, prevent pollution and conserve resources.

Meeting the demands of ESG criteria means disclosing the impact your business has on the environment. This disclosure can come in the form of a sustainability report and from green business certification.Both require the measurement, tracking, and recording of an entity’s environmental footprint, while also demonstrating to key stakeholders that the business is taking environmental responsibility seriously.

Why meeting environmental ESG criteria is good business

A 2022 Business of Sustainability Index report indicated 66% of US consumers and 80% of young US adults surveyed – who were 18-34 years of age – were willing to pay more for environmentally friendly products versus less sustainable competitor options.

Yet, what was most interesting about this study is that out of those surveyed, 78% stated they didn’t know how to identify environmentally friendly companies. As a counteractive measure, 68% use third-party certification to confirm a company or a product’s sustainability credentials. Hence, it’s not enough for a business to simply follow ESG guidance if the brand wants to reap the full benefits of business sustainability. An organization also needs a way of transparently showcasing its environmental performance to the world. Obtaining third-party green business certification is the most effective method for doing this.

In addition, according to the World Economic Forum’s Global Risk Report 2022, the top risks facing our economy are climate action failure, extreme weather, and biodiversity loss. With this in mind, investors want to put their money into business entities that have a robust strategy to negate these risks. Key stakeholders – investors, lenders, and government agencies – will look at corporate ESG performance, scores, and ratings to assess a firm’s risk exposure. For instance, a company that invests to optimize building insulation will boast a more efficient internal temperature control system. This will save the organization money over the long-term and business operations will be less exposed to extreme weather events.

S: SOCIAL

In our ESG image infographic you can see the social criteria look at how a business is involved with the communities within which the organization operates, and how the organization treats it’s workforce. Criteria include avoiding cheap overseas and child labor, enforcing strong workplace health and safety practices, supporting LGBTQ+ rights, preventing sexual misconduct, looking after the well-being of employees, and running an ethical supply chain.

Does the business have fair workplace diversity and inclusion policies? How does the brand treat suppliers, customers, and the surrounding communities? Does the business pay their employees a living wage? These are key questions the social category of ESG must address.

Why meeting social ESG criteria is good business

Modern businesses operate in a world that has tight social regulations, and one that creates a diverse and equal workforce while also reinforcing human rights and workplace health and safety. These regulations tighten as a risk management approach to prevent disasters such as the 2013 Rana Plaza collapse. Neglecting social responsibility with bla·sé attitudes leaves a business vulnerable to a disastrous PR crisis that threatens human life and wellbeing. These aren’t the brands investors, lenders and government agencies want to support. As such, socially responsible investing has piqued the interest of these stakeholder groups, and this trend continues to grow. For instance, at the beginning of 2020, U.S. assets under management that engaged in ESG investment strategies grew by 42% compared to the beginning of 2018, reaching $17.1 trillion.

In addition, according to a 2018 Conscious Consumer Spending Index, 59% of people bought goods or services from companies they considered to be socially responsible. Supporting these findings, 76% of consumers stated they were willing to pay more to be sure a product has been ethically sourced or produced. Hence, consumers are asking questions about ethics more than ever. Does the company do volunteer work? Does it donate any of its profits to help the surrounding community? Do employees feel physically and emotionally safe in the workplace? People want to know that a business isn’t taking advantage of people.

G: GOVERNANCE

In our ESG image infographic you can see the governance criteria covers policies, processes and practices that create the decision-making rules that direct and control a firm. Governance ESG criteria deal with leadership, audits, executive pay, shareholder rights, and internal controls.

The governance category also examines whether a business staggers its board elections, has a diverse board of directors, is transparent about its accounting decisions, and is accountable to shareholders.

Does the business pursue integrity and diversity? Is someone besides the CEO chair of the board?

Why meeting governance ESG criteria is good business

Good corporate governance ensures transparency and accountability and can prevent corporate scandals, fraud, and issues pertaining to corporate liability. An effectively run company that bases its structure and corporate culture on good governance principles prevents major disasters. Illustrating this is the American energy company Enron collapse, caused by the emergence of the business’s accounting frauds. The company’s stock price plummeted from $90 a share in mid-2000 to less than $12 a share by the beginning of November 2001. As such, shareholders, investors, and lenders seek companies with strong governance policies, which leads to higher company valuations that reflect less risky investments and improved financial performance. For instance, a 2019 study by the Diligent Institute found that the top fifth performers on corporate governance in the S&P 500 Index outperformed the bottom fifth by 15% over two-years.

Good corporate governance has also been shown to positively influence stakeholder perception of a company’s environmental and social responsibility, and consequently the brand is applauded. This creates a cascade of events whereby customer satisfaction and recommending behavior also rise. Results are according to a 2021 study that evaluated the effects of corporate governance on customer recommendations in the banking sector.

Supporting these findings, another older 2012 study concluded a very strong relationship between effective corporate governance and customer relationship quality (measured by customer trust and commitment).

Obtain third-party certification for ESG compliance

By ensuring transparency and accountability, the governance category of ESG realizes the full benefits of ESG compliance by precisely communicating a brand’s achievements, goals and challenges to stakeholders. And it’s here that the benefits of sustainability certification come into their own, as we explain.

A third-party certification provider will guide your organization to meet the stringent standards for environmental and social ESG compliance. In this sense, your sustainability certification is your internal governance manager.

The Green Business Bureau is one such certification body. GBB’s EcoAssessment and EcoScorecard host over 500 initiatives that help your business become socially and environmentally responsible. GBB aims to take the complexity out of business sustainability so organizations have the time and financial capability to focus on action for positive, sustainable change.

Click here to learn more about the Green Business Bureau and how we can help you be ESG compliant.

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