As corporate social responsibility expands into environmental, social, and corporate governance (ESG), more companies are understanding the impact of being sustainable, not just for revenue generation but for survival.
Environmental, social, and corporate governance (ESG) context
The concept of ESG first came about in a 2005 study by the International Finance Corporation (IFC), where it showed that companies that prioritized ESG benefited the most over the years. Fifteen years after that landmark study, ESG has become the new operating standard in the business world.
Companies now realize that they could no longer operate like before, without taking into account labor and ethical practices, and environmental consequences. The effects of climate change have made investors picky in terms of the companies and products that they decide to fund. Currently, it is estimated that sustainable investments have more than $20 trillion in assets under management, and there are no signs of that slowing down in the near future.
Firms with a strong ESG benefit in five major ways, according to consultant firm, McKinsey.
- First is top-line growth as a result of a supportive partnership with communities and governments.
- Next is cost reduction, when companies decide to prioritize green production such as conserving water and electricity.
- Less regulatory and legal intervention occurs when companies follow labor and environmental laws.
- ESG-oriented firms also report high productivity among their workforce as employees are more motivated to work for “credible” companies.
- Lastly, investment and asset optimization leads to long-term savings as capital is better allocated to sustainable manufacturing equipment and practices.
There are several ways that companies can incorporate ESG. First is to specify the changes and advocacies that they plan to implement, and then be practical in their execution. Transparency is another way that firms can employ to hold themselves accountable to their sustainability goals. Economists believe that if more firms prioritize ESG, investments could lead to a more sustainable and fair future, and could possibly slow down the effects of climate change.
Applications for environmental, social, and corporate governance (ESG)
Some industries that might be affected by ESG include:
- Manufacturing companies, as they may have to optimize their processes by investing in equipment and suppliers that operate on sustainable power and water generation.
- Retailer, as consumers might be willing to pay more for ethically sourced and manufactured products and services.
- Financial services firms, as assets could increasingly flow into investments funds with high ESG-ratings.
Questions to comment on
- Would you consider investing only in sustainable companies? Why or why not?
- Would you be willing to buy only sustainably made products? Why or why not?