When business owners and their leadership teams convene to strategize, the central question often revolves around, "How can we strategically expand our company to reach the next level of success?"
While this remains a crucial question to address, today's highly transparent business environment highlights the importance of considering broader factors. Businesses can inadvertently face reputational risks by overlooking the broader impacts of their operations. One such consideration is the Environmental, Social, and Governance (ESG) framework.
3 critical activities
ESG generally refers to how companies handle three critical activities:
- Environmental practices, including the use of energy, production of waste, and consumption of resources,
- Social practices, which may include fair labor practices; worker health and safety; diversity, equity, and inclusion; and other aspects of your business’s relationships with people, institutions and the community, and
- Governance practices, including business ethics, integrity, openness, transparency, legal compliance, executive compensation, cybersecurity, and product or service quality and safety.
Missteps or miscommunications in these areas could draw public scrutiny or raise compliance issues with regulatory agencies.
Many potential advantages
On the bright side, there may be advantages to integrating robust ESG practices into your strategic planning and daily operations. Doing so, in some cases, could lead to stronger financial performance thanks to benefits such as:
Higher sales. Many customers — particularly younger ones — consider ESG when making purchasing decisions. Some may even be willing to pay more for products or services from businesses with stated ESG policies.
Reduced costs. Focusing on sustainability can help companies identify ways to reduce their energy consumption, streamline their supply chains, eliminate waste, and operate more efficiently. Other ESG initiatives may help businesses avoid the costs and bad publicity associated with government intervention and liability concerns, such as product- or service-related lawsuits, discrimination or harassment claims, and boycotts.
Improved access to capital. Clear and demonstrable ESG practices may provide growing companies with access to low-cost capital. Some investors consider ESG when adding businesses to their portfolios. Plus, companies that implement transparent ESG initiatives may be perceived as lower-risk investments.
More success in hiring and retaining employees. As climate change continues to reveal itself and weigh on some people’s minds, certain job candidates may favor companies that can clearly demonstrate sound environmental practices. Once hired, these employees will likely be more inclined to stay loyal to businesses that are addressing the issue.
Other aspects of ESG also speak to the current concerns and values of workers. Many of today’s employees want more than a paycheck. They expect employers to care for their well-being and protect them from threats such as corruption, unethical behavior, and cybercriminals. Comprehensive ESG practices may reassure such employees and keep them in the fold.
Your call
Opinions on the importance of ESG vary among stakeholders. How businesses choose to address ESG, or whether they integrate it formally into their operations, is a decision left to each company's ownership and leadership team. However, as businesses engage in strategic planning and plan for the future, considering the impact of ESG-related issues will likely be time well spent.
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