What is ESG and what does it mean for your business?

What is ESG?

ESG stands for environmental, social, and (corporate) governance. It is a set of practices and metrics used to evaluate a company beyond its financial performance.

It’s not just numbers on a balance sheet that tell people your value. ESG practices and metrics offer a way to measure your company’s health and stability.

Many investors will look at businesses through an ESG lens. If they see you taking ESG seriously, they will more likely see you as business that considers important issues— long-term ones that deliver a financial impact.

Environment: The E in ESG

Of all the ESG issues facing boards of directors and management, “the environmental ones are easy, frankly,” says Bob Willard, founder and CEO of The Sustainability Advantage.

Willard, who spent 34 years with IBM Canada and provides leadership and management training on sustainability topics, highlights seven elements business owners need to look at to measure their environmental impact in ESG.

1. Energy

Are you driving inefficient delivery routes? Are you leaving machines and lights on when they’re not in use? Does your energy come from fossil fuels or renewables? How you choose to adapt will be the measure of your performance in this category.

2. Greenhouse gases

The federal government aims to reduce Canada’s greenhouse gas (GHG) emissions by 40% to 45% of 2005 levels by 2030 and to net-zero emissions by 2050. Is your company on board for a greener economy? If it’s not, you risk missing out on the business opportunities that will arise from the transition to a greener economy.

3. Water

Water scarcity is a growing problem, even in North America. As a result, the use of water in industrial processes is  receiving more scrutiny. Aim for maximum efficiency here.

4. Pollution

What flows down your drains or out of your exhaust pipes? How do you dispose of chemical waste? These are sources of pollution that will not just harm the environment but also hurt your ESG evaluation and your reputation.

5. Waste

The less waste you produce, the better, Willard says. Think of it this way: every scrap you throw out represents an inefficiency. Or, think of it as tossing out dollar bills with your trash.

6. Materials

Where do you source your materials? Do they come from renewable resources? Can they be recycled? Consider lowering your environmental footprint through the materials your business purchases.

7. Encroachment on nature

Finally, Willard says entrepreneurs shouldn’t allow their places of business or their operations to encroach on natural places like riverbanks, wetlands and forests. Destroying or degrading these places can hurt your company’s reputation and even incur penalties — not to mention the inherent issues that come with harming ecosystems. Make sure your business is not being built on sensitive land and that you keep your environmental footprint small.

Social: The S in ESG

A business is defined by the people who bring it to life and support it. Investors trying to identify risks and looking at ESG reporting will focus on issues like employee turnover rates and how a company treats its employees.

When a company treats its employees well—with a workplace built on equity, inclusion and fair remuneration—stakeholders see an organization that is stable and safe to invest in.

Community also makes up a big portion of ESG’s social component. Companies that pay taxes, hire and buy locally (where possible) and support local initiatives are seen in in a better light than those that don’t engage with their communities.

Governance: The G in ESG

Governance may well be the most important part of ESG, Willard says, because it “drives everything.”

Laying out the economic, social and environmental values, stakeholder engagement plans, supply chain transparency, and other aims and targets of the company can go a long way toward achieving them.

“The dialogue among senior executives as to what the goals should or could be is almost as important as what the goals end up being. They have to think: ‘Why would we want to improve? What’s our goal? What will achieving it give us?’”

Elevate ESG tracking to the level of financial reporting. Commit your board of directors and management to focussing on and improving your company’s ESG performance.

Learn about the building blocks of corporate governance and ensure you are using governance best practices by downloading the free BDC guide, The Science and Art of Good Corporate Governance.

How to get started with ESG

Willard has been advising businesses on ESG issues for over 20 years. When it comes to implementing ESG practices, he suggests starting at the top, with your company’s board of directors. After all, he says, “they’re responsible for the oversight of the organization’s management.”

Your company’s directors have a duty of care to the company’s stakeholders and the community at large, Willard says.

This means that the directors overseeing a company’s ESG strategy should be paying attention to risk management, including environmental and social risks, and paying executives according to their performance against ESG targets, he adds.

To get a snapshot of your company’s ESG progress, Sandra Odendahl, BDC’s Senior Vice President and Head, Sustainability, Diversity & Social Impact, recommends you do a self-assessment using the B Impact Assessment tool. The free assessment measures your company against B Corp standards to reveal areas for improvement, be they environmental, social or governance-related.

“The B impact assessment illustrates how to structure your thinking around something you’ve probably been doing instinctively or in an ad hoc way already,” says Odendahl, who has over 25 years of experience in environmental science, corporate sustainability, and responsible finance.

Why is ESG important?

ESG matters to your operations, and to future funding, business and recruitment opportunities. It demonstrates to stakeholders that you’re mitigating your business’s risks and planning for a changing future.

Is ESG reporting mandatory in Canada?

Most companies are not required to report on their ESG performance, though many countries have begun to implement mandatory reporting. Because of this, most businesses looking to build a sustainable future see committing to ESG as a critical move.

Corporations Canada does require that federally registered companies report on their board and management diversity. Furthermore, since 2001 Canada’s largest banks and life insurance companies have been federally mandated to produce public accountability statements outlining their contributions to the economy and society.

A 2023 BDC study, which surveyed major buying organizations both public and private, found that 82% require their suppliers to disclose information about at least one ESG criterion. The study drew from two surveys, the first of which reached 121 large companies or public-sector organizations that source from Canadian SMEs. The second survey was conducted among 1,251 SMEs that supply large private- or public-sector contractors in Canada.

Data show that more buyers plan to require ESG reporting from suppliers, and BDC’s Chief Economist, Pierre Cléroux, predicts that “this trend will be particularly pronounced for businesses looking to close sales with large corporations or public-sector organizations.”

What percentage of major buyers require ESG reporting from their suppliers?

Employees today are sensitive to whether you’ve put ESG best practices into place. Younger employees, in particular, are inclined to choose and stay with an employer that is adopting strong ESG practices. Significant numbers of older employers are also demanding safe, supportive and equitable workplaces.

How much does ESG cost?

Half of SME respondents to BDC’s 2023 survey on ESG said that implementing ESG practices resulted in increased operating costs. Just over a third said it resulted in an added administrative burden. But they also said the benefits outweighed the increase in expenses.

Obtaining new ESG certifications (like B Corp, for example) can help you attract clients and stand out among competitors. Implementing consistent oversight processes to track your ESG progress will allow you to bid on contracts more quickly and in a more detailed fashion. Having your ESG metrics on hand will impress investors and potential customers and demonstrate your potential to thrive in an ever-changing world.

What are the differences between CSR, ESG and sustainability?

Although CSR, ESG and sustainability overlap in their outcomes (for example, they all emphasize social benefit and environmental protection), they differ in their primary purpose and impact areas.

Odendahl frames it like this: “CSR nudges me to contribute to my community. ESG satisfies investors that environmental, social or governance issues won’t blindside them. Sustainability is what I embed into my core business strategy and decision-making processes.”

CSR, ESG and sustainability all help mitigate risk. Sustainability, however, deliberately aims to also create positive value in the world outside the company—for now and for the future.

CSR stands for corporate social responsibility.

Next step

Download our free study ESG in Your Business: The Edge You Need to Land Large Contracts to find out which ESG practices are most important to major buyers and how you can incorporate ESG practices into your business.