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

ESG is a set of standards used to evaluate a company’s environmental and social impact

7-minute read

The business world is awash with acronyms: CEO, CFO, DEI, CSR, ROI and EOD. But there’s one abbreviation that business leaders and managers need to get familiar with ASAP: ESG.

These three letters are top of mind for today’s investors, lenders and, increasingly, current and potential employees. So, what is it exactly, and how can businesses benefit from it?

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.

In other words, ESG practices and metrics offer a way to measure a company’s health and stability beyond what may be deduced from the numbers on its balance sheet.

ESG came from the recognition that a company’s financial statements don’t tell a prudent investor everything they need to know about the risks that a company should be managing.

Investors use ESG criteria to ensure that a business is considering the important non-financial issues that could have a financial impact in the long term.

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 highlights seven elements business owners need to look at to measure their environmental impact in ESG.

1. Energy

Are you driving inefficient delivery routes or 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. Companies that aren’t on board 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

Think about what flows down your drains or out of your exhaust pipes and how you dispose of chemical waste—these are sources of pollution that can hurt your ESG evaluation, your reputation and the environment.

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 of encroachment can hurt a company’s reputation and even incur penalties — not to mention the inherent issues that come with destroying ecosystems. Make sure your business is not being built on sensitive land and that you keep your environmental footprint small.

The seven elements of environment in ESG

  1. Energy
  2. Greenhouse gases
  3. Water
  4. Pollution
  5. Waste
  6. Materials
  7. Encroachment on nature

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.”

He explains that the act of laying out the economic, social and environmental values, 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?’”

Elevating ESG tracking to the level of financial reporting commits the board of directors and management to focussing on and improving their 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 a company’s board of directors. After all, he says, “they’re responsible for the oversight of the organization’s management.”

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

This means that 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 a company’s ESG progress, Sandra Odendahl, BDC’s Senior Vice President and Head, Sustainability, Diversity & Partnerships, recommends businesses do a self-assessment using the B Impact Assessment tool. The free 200-question survey measures companies against industry 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,” Odendahl says.

Why is ESG important?

ESG tracking unlocks funding, business and recruitment opportunities by demonstrating to stakeholders that you’re mitigating your business’s risks and planning for a changing future.

If a company has the bigger picture in mind, it is a better place for my money.

Is ESG reporting mandatory in Canada?

Although most companies are not required to report on their ESG performance, many countries have in fact begun to implement mandatory ESG reporting. Because of this, most businesses looking to build a sustainable future now see it 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. 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.”

Proportion of major buyers requiring their suppliers to report on ESG criteria

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. That’s not to say that older employers aren’t 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 and just over a third said it resulted in an added administrative burden. But they also said the benefits outweighed the increased expenses.

Obtaining new 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 that you are pursuing the practices you need to thrive in an ever-changing world.

The differences between CSR, ESG and sustainability

Although CSR, ESG and sustainability may 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; and sustainability is what I embed into my core business strategy and decision-making processes.”

  CSR ESG Sustainability
Purpose To allow a company to contribute to the community and enhance its reputation beyond its core business operations. Originally designed for investors to make sure they were considering the important non-financial issues that could have a financial impact in the long term. A business approach that balances the economic, social and environmental needs of the present without compromising the ability of future generations to meet their own needs.
Benefit Enhance your company’s reputation among its community, customers and employees. Assure investors and clients that your company is actively mitigating risks and prepared to adapt to a changing world and business climate. Demonstrate to all stakeholders that your business strategy incorporates environmental, social and economic factors.

All three can help mitigate risk, but sustainability deliberately aims to also create positive value in the world outside the company—for now and for the future.

Next step

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

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