Why is ESG Essential to Your Organisation?

You wouldn’t be reading an article about business management without coming up against at least one set of acronyms.

ESG stands for Environmental, Social and Governance. It’s a framework that’s used to help organisations align their behaviour with practices like environmental protection and sustainability, social responsibility and partnership, and best practice corporate governance. It refers to the process of examining the impact of an organisation’s actions and policies on these areas too and reporting back progress.

ESG is an essential aspect of the corporate governance of an organisation. Each element is individual but is also integrated into the others, creating a complex net of relationships between each section. When implemented correctly, ESG frameworks can help an organisation grasp new opportunities for growth, deal with potential threats and better mitigate unforeseen circumstances, as well as saving money and adding real investment value and productivity to a company.

We’ve taken a closer look at just how crucial ESG is to the success of modern organisations. Here are some of the ways that it can enhance your performance.

Why is ESG important to your organisation?

In an uncertain world, where in the last five years alone we’ve seen everything from a one in a century pandemic, a devastating war in Europe, and skyrocketing energy prices, having a framework that can add some much needed resilience to your organisation is a welcome prospect for most boards of directors. Here are some of the main reasons that more and more boards and investing in ESG as a way to enhance the performance of their organisations.

1.   It can boost your productivity

ESG policies are widely considered to boost productivity, create a happier, more well-motivated workforce and to contribute to making your processes more efficient. For forward-thinking companies, ESG is fast-becoming an intrinsic part of their organisations, where boards know that they can’t rely on the same traditional tools that they always have done to generate productivity and motivation in their employees.

With the UK in the grip of an ongoing slump (or flat-lining, if you want to put it a bit more bluntly) in productivity, it’s clear that many employers are getting desperate for ways to improve the quality and quantity of their output. ESG policies can contribute towards that by encouraging a more motivated and satisfied workforce.

In a journal article by Alex Edmans, cited in this McKinsey Quarterly Review 2019 article, Edmans posits that there is a positive link between employee satisfaction and larger shareholder returns, showing that ESG policies on making sure that  In the article, he argues that companies which were listed on the ‘100 Best Companies to Work For’ list by Fortune ended up creating higher stock returns per year than their rivals who were not included in the list.

This is some of the clearest evidence to date, supporting the informal hypothesis that most company boards had already held for a while – that a satisfied workforce makes a profitable company. ESG policies can help your company to achieve that much-sought after balance.

Summary

• ESG policies encourage a more motivated workforce, improving satisfaction and ultimately, productivity.

2.   It can attract and retain talent

It’s shortsighted to underestimate the potentially powerful effects of a well-thought through ESG strategy on employee retention and recruitment. When implemented correctly, a good ESG policy will help to attract high worth employees to your organisation and encourage existing ones to stay and build their careers with you, ensuring you have the right blend of skills available.

ESG strategies tap into that innate human characteristic about wanting to feel part of something bigger. Studies have shown that feeling like your work is making better the world a better place can be a great motivation for an employee choosing to develop their career at their current company, or upping sticks and finding one that does allow them this.

With change climate drawing ever nearer, social problems exploding and moral and ethical failures clouding the reputation of organisations, employees are feeling more powerless than ever before to effect meaningful change in their lives. Focusing on Environmental, Social and Governance strategies as strategic priorities can help to show employees that they are part of a bigger, positive mission that isn’t just about making profit for the sake of making profit, and that they have a valuable part to play in achieving its aims.

The cost of new hires is currently sitting at around 20% to 30% of an employee’s final salary (if you contract a recruitment agency to handle your recruitment process) according to the British Business Bank.

Summary

• ESG demonstrates to current and potential employees that your organisation is committed to making the world a better place.
• This can motivate existing employees and attract new ones with similar values

4.   It can reduce costs

ESG frameworks are far from being expensive projects that sink a lot of resources and don’t give anything back – they’re often the opposite, contributing savings to budgets and adding real value.

You can see the cost savings that ESG provides quite clearly in policies related to sustainability and the environment at a company. Many of the measures implemented in environmental policies at organisations can help to save money, by virtue of the fact that they’re fundamentally focused on using our existing resources more efficiently, as well as smarter. By investing in environmentally-focused policies and governance, you’ll also benefit from a whole range of other benefits, besides just the obvious benefit of positioning your organisation as a responsible, leader in its field that is interested in giving something back to society.

If you need convincing about how investing in environmental policies can actually save you money, take, for example, a particularly sore subject at the moment – the current price of energy.

Many of the measures that form the backbone of the ESG strategies of medium and large organisations have an indirect impact on reducing energy costs, whilst making the organisation more resilient to a constantly changing business environment. For example, implementing these environmental measures can help save a surprising amount of money:

• Reducing energy use by turning off unused lights, devices or heaters – lower overall energy usage and thus costs
• Improving insulation – improved energy efficiency, better use of existing heat, lower costs
• Installing double or triple glazed windows, or adding thermal curtains – improved energy efficiency, better use of existing heat, lower costs
• Cycle to work schemes – less car parking spaces needed on office premises
• Recycling rubbish – saving money in general

In a world where the cost of energy is predicted to continue climbing, and with little apparent Government help for businesses coming in the immediate to long-term, it’s vital that companies save every penny they can. Integrating ESG into your company governance structure and operation is a flexible, intelligent way to make sure every pound counts at your company.

Summary

• ESG measures, particularly environmental measures, by their fundamental nature are focused on making better use of existing resources and improving efficiency. As a result, organisations can find an increase in cost savings when implementing them properly.

5.   It can improve brand reputation

One of the key effects of implementing an ESG policy is the fact that it builds strong connections between your organisation and wider society. As a result, it can help you to align your organisation with values and principles that your clients care about, and gives you the framework to take the actions that will add credibility to your brand reputation. 

As Bo Bothe argues in this fascinating Forbes article, ESG reporting lets an organisation align itself with particular values that affect brand perception – in other words, it allows an organisation to associate itself with ideas, actions or principles that might have strategic market value in some way. Strong values at the heart of a brand also give it direct and purpose – two essential concepts to any organisation wanting to stay alive.

The days are long gone when businesses and organisations could expect to have the unconditional support of their clients: brands now need to fight for the loyalty of every customer.

Today, debates about ethics, trust and good governance have taken on heightened importance in the public consciousness following a range of ethical scandals, like the 2014 Diesel Emissions Scandal. As a result, it’s essential that organisations respond and show that their brands are responsible, can be trusted to act ethically and that are making the world a better place than they found it. ESG can do this, and do it well.

Put simply, people want to do business with organisations that share similar values. Nowadays, belief in the negative impacts of climate change, a desire to improve and support the local community they operate in, and in the need to have responsible governance are dominant concerns in society, and, as a result, they should be dominant concerns in organisations. Having a clear commitment to ESG bedded in throughout your company can help to bolster your reputation as an industry-leader and as a company that can be trusted to act responsible.  

Summary

• Consumers want to do business with organisations that share similar values
• ESG policies can add credibility to a company’s brand offering, improving your brand reputation.

5.   It can identify risks and opportunities

The last few years have shown just how damaging uncertainty can be when it comes to encouraging business growth and investment. With everything from a pandemic through to a European land war erupting and upending stability, it’s becoming increasingly clear that a strong organisation is an adaptable one.

One of the core strengths of ESG strategies is that it is focused on identifying, planning for and mitigating risk whilst also looking for opportunities for growth too. In effect, Environmental, Social and Governance policies allow you to turn a potential weakness – shifting business contexts and emerging threats – into an advantage. They help your organisation to soberly assess current risks and to create a plan for dealing with them.

In an increasingly uncertain world, the stability that having a dedicated ESG plan can provide your organisation is not to be underestimated.

Summary

• Risks and uncertainty are becoming more common in a world beset by climate problems, economic uncertainty and social unrest.
• ESG allows your organisation to focus on risk management, and identify and mitigate potential threats.
• ESG also allows you to capitalise on potential opportunities.

ESG strategy: essential in the 21st century

Helping to enhance everything from your cost-saving and risk management through to recruitment and retention strategies, ESG should form an absolutely vital part of your organisation. We hope this blog has helped you to think about how ESG is essential to your business and has got you thinking about some of the ways that it can really impact your brand for the better.

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