What is ESG and what does it mean for your business?
The business world is awash with acronyms—CPA and CBV, GAAP and GAAS, IPO and IRR, KPI and ROI, ZBA and ZBB, to name a few.
But there’s one abbreviation that business leaders and managers need to get familiar with ASAP, and that’s ESG.
So what exactly is ESG?
What is ESG?
ESG stands for environmental, social, and (corporate) governance. It is a set of practices used to evaluate a company’s operational performance as it relates to social and environmental impact. This evaluation can be done internally or externally by investors or other stakeholders.
The environmental criterion looks at whether a company pollutes or implements sustainable practices. The social criterion considers how the company works with and impacts its employees, customers, suppliers and the community as a whole. Finally, the governance criterion looks at the company’s leadership, its internal controls and audits, board governance oversight and executive pay.
ESG is widely used by investors and other stakeholders to evaluate a company’s impact beyond its balance sheet. It can also be used to evaluate external risks faced by a company as well as its future growth prospects.
Bob Willard, founder and CEO of The Sustainability Advantage, who has been advising businesses on ESG issues for 20 years, says ESG deals with a company’s “impacts on people and planet.” Willard adds. “There are two kinds of people; people who work for you, as well as the larger community.”
“So you have the environment, your employees, customers and the community. Then there’s governance: how you run the company.”
Willard is also on the faculty of Directors College at McMaster University in Hamilton, ON, which educates “directors on how to be directors.” He teaches the module on “what they should be paying attention to, from an ESG perspective.”
How to get started with ESG
Clearly, ESG is something that no successful or reputable business can afford to ignore. But how can you begin the process of making your business a good corporate citizen, as well as a good investment?
According to Willard, the board of directors is the best place to start the process of making ESG an integral part of the organization. “They’re responsible for the oversight of the management of the organization,” Willard says.
While management has a ‘duty of care’ to run the company well, the company’s directors have a ‘duty of care’ to the company’s stakeholders—including the community at large—to make sure their well-being is protected, Willard says.
The directors should be “making sure that they’re paying attention to risk-management, including environment and social risks, […] making sure they’re paying executives according to how well they’re doing against targets they’ve set for themselves on ESG, making it matter,” he says.
Willard stresses that business owners can start the process of implementing ESG practices. “A free, open source tool like the Basic Sustainability Assessment Tool could be used by SMEs to do the self-assessment and can help them identify the issues that need the most focus.’’
Environment: The E in ESG
Of all the ESG issues boards of directors and management are faced with, “the environmental ones are easy, frankly,” Willard says.
Willard explains that there are seven elements business owners need to look at to measure their environmental impact in ESG.
“One of them has to do with energy and how much renewable energy you’re using—because you’ve got to wean yourself off fossil fuels and get onto renewable energy.”
2. Greenhouse gases
“Another one is greenhouse gases […] and the way in which you’re working towards net-zero,” Willard says. The federal government has set a goal of reducing Canada’s GHG emissions by 40-45% of 2005 levels by 2030 and net-zero emissions by 2050.
Then you get into water. Willard says that “in some jurisdictions water is a big deal. There are parts of North America that are struggling with water [supply] right now. And the use of water in industrial processes is getting a lot more scrutiny.”
The fourth element is pollution, which is “non-GHG emissions going into the air, land and water.”
Pollution is closely tied to waste, and how much waste is being produced by your business. The less waste you are producing, the better, Willard says
Next Willard says the next environmental factors to be examined “are the attributes of the materials, and the goods and services you’re bringing into the organization, and the biodegradability of those things, the renewable content of them, the recycled content, all that good stuff.”
Finally, Willard says companies need to be concerned about “encroachment, trying to make sure that the business, the location of the business, is not encroaching on sensitive terrestrial systems or marine ecosystems.”
Once those environmental issues are identified and quantified, “we can set goals for those fairly easily and companies can assess how they’re doing in progress towards those goals,” he says.
The seven elements of environment in ESG
- Greenhouse gases
Social: The S in ESG
On the social or “people side” of ESG, employee remuneration, health and well-being, human rights issues, like diversity, equity and inclusion, need to be assessed, rated and targeted for improvement.
Community is a big part of the social side of ESG, such as paying your fair share of taxes, making donations and other philanthropic work, participation in service organizations, supporting community projects.
Companies should be “trying to make sure that this [community] is not only a good place to work, but to live and play,” Willard said.
Governance: The G in ESG
While the last letter in ESG is G for governance, it may well be the most important part of ESG. “Governance drives everything and is really, really critical,” Willard says. “And purpose drives governance and everything else.”
Willard explains that just the process of articulating and formulating ESG aims, targets and goals can go a long way towards achieving them.
“The discussion, 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’s in it for us if we were to achieve that?”
By elevating ESG to the level of financial reporting, it commits the board of directors and management to focus on and improve their performance in those environment, social and governance areas.
ESG is key to long-term planning
Willard believes that ESG and environmental sustainability are key to ensuring that business leaders build companies that are resilient and sustainable over the long haul, rather than taking the short-term view of maximizing shareholder value.
“Resilience is a good synonym for sustainability. If you can recover from the COVID pandemic, or if you can get ready for climate change and its impacts, both the acute risks, as well as the more chronic risks, you can make sure that you’re positioned, not only to survive, but thrive in a different kind of economy.”
For Willard, the economy of the future will be more just, more sustainable and more low carbon than the one we have today. “That is the only way we’re going to be able to continue in this century to look after ourselves and enjoy a good quality of life.”
Want to go further? The B Corp certification is one of the more rigorous, widely used ESG standards today. Try the free B Corp assessment tool to help you understand all aspects of ESG in your organization and see how you could improve.
ESG in your business
Discover how ESG criteria are changing procurement practices and impacting suppliers in Canada in BDC study ESG in Your Business: The Edge you Need to Land Large Contracts