Simply put, ESG is a set of principles that requires business owners and directors to look at operating the companies they manage with more than just the traditional bottom line approach in mind (where profit maximisation by any means necessary is the order of the day). Instead, it promotes giving attention to the non financial factors of environmental impact, social responsibility and governance of a company.
The environmental arm of ESG requires companies to consider the impact of their operations on the environment, ways to reduce their carbon emissions and waste and how to better manage their resources.
Companies spearheading the ‘E’ in ESG include Unilever which is currently transitioning to renewable energy across its operations and developing fossil fuel free cleaning and laundry products. By incorporating sustainability strategies, companies positively impact the environment and avoid contravening environmental legislation and the financial penalties and litigation that could arise as a result of such contravention.
ESG’s social branch is people focused, requiring companies to consider their stakeholders’ interests (where stakeholders include employees, suppliers, investors and the communities in which such companies operate) in decision making and operations. Despite the daily advancement of artificial intelligence and other kinds of technologies, humans still play a crucial role in the advancement of business today.
As such, human and labour rights are a critical component of this branch as the promotion of human rights, both internally and externally, and fair labour practices in the workplace are analysed when measuring a company’s ESG performance.
Companies that implement policies aimed at creating positive social impact can expect to have their reputations positively boosted, which will in turn likely result in increased support from stakeholders.
Focus on the ‘S’ in ESG has additionally seen companies experience increased employee retention and attract talented prospective employees as current employees experience job satisfaction and feel a sense of pride towards their employers while prospective employees become attracted to socially committed companies that are considerate of their staff and society as a whole.
Lastly, ‘governance’ considers the practices and composition of a company’s leadership team. The ethics of those in leadership are also considered, requiring companies to investigate and discipline those accused and subsequently found guilty of improper conduct.
One of the benefits of diverse leadership include the diversified and expanded thinking capabilities within such teams. This results in a positive outcome where those in leadership have increased ability to pre empt a multitude of risks, identify opportunities, develop creative problem solving strategies and address complex issues.
This is supported by a study conducted by McKinsey and Company wherein the executive board composition, returns on equity (ROE) and margins on earnings before interest and taxes (EBIT) of 180 publicly traded companies were analysed over a three year period. The study’s findings are as follows:
With increasing global environmental awareness and advocacy for improved human and labour rights, the need to integrate ESG into corporate policy has become all the more important as stakeholders are no longer merely concerned with associating themselves with profitable companies, but rather with profitable companies that simultaneously prioritise the environment, society and good governance (hence the rise in ESG investing).
Essentially, ESG is not just a temporary corporate fad. Although South African companies are not yet legally required to implement ESG, those companies that elect to do so are likely to reap the benefits of the competitive advantage this improved way of doing business would afford them (just as many of their international counterparts have benefitted).
Companies are therefore encouraged to consult with legal practitioners and other appropriate professional advisers to assist in aligning their businesses with ESG.
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