Ignorance might mean bliss, but on ESG ignorance is unaffordable. According to Capify’s research, some 56% of small business owners are not fully familiar with the term ESG. This is understandable given that to date it’s mostly large corporates that have had to engage with it. But times are changing, as support and interest in the recent COP26 summit illustrated. To recap, ESG stands for Environmental, Social and Governance – but spelling this out that only begs the question: what really is it and how does it relate to my business?
According to authors (https://corpgov.law.harvard.edu/2020/08/01/introduction-to-esg/) from Harvard Law School “ESG, at its core, is a means by which companies can be evaluated with respect to a broad range of socially desirable ends.” Put more simply, it’s about a business having a more meaningful, good outcome than making money for its owners or employees. For instance, a widget maker would adopt ESG if it tried to minimise the risk of injury to its workers, made donations to local community groups and tried to operate in as energy-efficient way as possible.
Indeed, such is the desire among workers, investors and customers to see companies embrace an ESG approach that not doing so risks a business’ ability to operate and, ultimately, earn money. Your staff are likely to leave for employers that operate more sustainably or ethically, customers will choose suppliers that do the same, and investors are putting pressure on companies to make ESG considerations too.
At present it’s mostly large companies that face this pressure, either through market forces or a regulatory standard such as the requirement to include certain statements in their annual reports. However, as the world moves towards fulfilling the commitments for Net Zero – operating without producing an excess of greenhouse gases – over the coming decades medium-sized and small businesses will have to look at ESG, and the E in particular. As we’ve explained before, corporates are also looking at emissions in their supply chains, meaning smaller businesses they have a relationship with need to address ESG as well.
While approaches to ESG may change, a typical focus under the three headings is:
Amount of greenhouse gas emissions
Amount of energy used
Amount of waste generated or plastic used
Health and safety incident rates
Number of data breaches
Diversity on the board
Percentage of equity owned by the board
Fines or litigation related to business ethics