Maximizing the Impact of ESG

Overview

Environmental Social Governance (ESG) is a frequent topic of conversation in conference rooms big and small. Those three words cover an immense amount of ground and provide little context to the real impact ESG can have on companies. Organizations big or small are beginning to implement, track, and structure their processes around the principles of ESG. From the top down, ESG strategies are creating structure, providing purpose, and driving down environmental impact.

Where Did ESG Originate?

The acronym ESG, which stands for Environmental, Social, and Governance was first used in a UN environment program initiative in the Freshfields report in 2005. The report provided a legal framework for the integration of environmental, social and governance issues into institutional investment. In its current form, ESG refers to a wide range of standards that have a direct or indirect impact on financial operations. Since the introduction of the term “ESG” the utilization, applicability, and industry acceptance has grown exponentially. ESG assets have grown 456 percent since 2005 and are on track to be worth $53 trillion by 2025, representing more than a third of the projected total assets under management. To put into perspective, in 2020, 92 percent of the S&P 500 companies published a sustainability report.

Over the years, ESG has grown to cover issues like supply chain operations, safety measures, and resource health. When correctly applied, ESG can provide a widely recognizable and universally accepted language that can be used as a tool to better understand a company's health. The swift adoption of ESG is producing a range of results while revealing pitfalls that need remediation.

On the positive side, companies that have become early adopters of ESG have seen positive results in employee retention, especially with individuals who are beginning their careers. Companies that have established ESG goals have distinguished themselves against competition and have benefited from buyers’ habits leaning more towards sustainability focused brands.

In contrast, establishing an ESG strategy comes with its own challenges, often leading companies to delay efforts and obfuscate progress, often referred to as greenwashing or green hushing. One of the leading causes of this behavior is the lack of accepted standards for guidance and reporting. This can lead to complications with collecting and reporting on data, which then translates to companies falling short of their stated goals.

Effective ESG Strategies Are Rooted in Data

Data collection for industrial companies has become complex in almost every step of the process. Effective data collection, management, and reporting for ESG requires putting new competencies in place. This is particularly evident in the new challenges related to non-financial reporting metrics. Without a standardized reporting system, companies are not obligated to report on ESG. It is up to the companies themselves on how they choose to organize their data and if they want to adopt metrics or decide on them internally. This gray area of ESG reporting can lead to companies greenwashing and without a system for checks and balances many organizations continue to stretch the truth.

In 2020, the World Economic Forum (WEF) held its annual meeting in Davos. At this meeting, the world’s largest 120 companies supported an effort to develop a core set of common metrics and disclosures on non-financial factors for their investors and other stakeholders. After 6 months of consultation, the “Stakeholder Capitalism Metrics” and disclosures were agreed upon.

The 21 core and 34 expanded metrics were derived from existing frameworks and created so the data can be compared between companies regardless of industry and/or region. Since completion, 137 companies have agreed to include the Stakeholder Capitalism Metrics in their sustainability reports and 55 companies have used these metrics for the second year in a row. The result is that WEF has now provided a resource for companies who are in search of reporting metrics, creating an avenue for companies to compare progress amongst one another. Resources like this will be very useful while companies await further rules and guidelines from their respective governments.

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Keywords: ESG Reporting, Industrial Data, Workforce Retention, Gen Z, ESG Metrics, ARC Advisory Group.