What Businesses Should Know About ESG and Its Value to Stakeholders
Corporations are more mindful of their impact than ever before, making environmental, social and governance factors increasingly valuable in shaping your company’s narrative.
Business Roundtable recently released a game-changing corporate purpose statement declaring that companies should work to benefit all stakeholders—not just shareholders, but also customers, employees, suppliers and surrounding communities.
The formal statement reflects a gradual shift in the marketplace. Today, 72 percent of adults believe public companies should be mission-driven; 80 percent of 25- to 34-year-olds want to work for socially engaged companies. And more companies are prioritizing environmental, social and governance (ESG) factors—such as how they’re improving diversity and inclusion, adopting more sustainable practices and making a positive impact on their community—as a core element of their business. But how can your business demonstrate and measure its commitment to these factors?
The first step is to understand the framework for ESG and how to apply it to your business.
Measuring Success in More Than Dollars
ESG is the idea that many factors outside traditional financial analysis can be used to assess a company and its performance, such as:
- Environmental: carbon emissions, waste management, water usage
- Social: supply-chain labor standards, workplace health and safety, employees’ healthcare access
- Governance: compensation practices, internal control processes, tax transparency
Companies may outline, or disclose, their ESG efforts in various documents, from corporate responsibility to annual reports—or even a standalone ESG report, which JPMorgan Chase first published in 2015. As the Head of Sustainability, Marisa Buchanan and her team develop the annual report detailing the firm’s work to promote sound governance, treat clients fairly and transparently, invest in employees, support communities and advance sustainability.
While these are top priorities for JPMorgan Chase, another company may choose different ESG priorities based on its industry and activities. A healthcare organization, for example, may concentrate on improving community health, whereas a brewery might direct its efforts toward conserving natural resources.
Marisa Buchanan, Head of Sustainability, JPMorgan Chase
Prioritizing ESG Can Benefit More Than Just Your Business Reputation
Customers and employees aren’t the only stakeholders who look at ESG data. Investors may also use this information to filter companies that aren’t sustainably minded and thus may pose a financial risk. For instance, a company that uses harmful ecological practices could set off an environmental disaster that results in a large drop in its stock price, along with billions of dollars in associated losses.
ESG disclosure also gives you the chance to tell your company’s story. While you can’t directly control your ESG score, you can control your company’s narrative by connecting your core ESG values to how you do business.
How to Navigate and Improve Your ESG Rating
Hundreds of ESG raters use publicly available data to assess your business and share the results with the public and investors.
Each rater has different evaluation criteria and even different rating systems. As a result, companies may have difficulty navigating the ESG space. Fortunately, Buchanan had a few tips:
“Good ESG performance is in the eye of the beholder,” Buchanan said. That’s why investors generally subscribe to several raters to get multiple perspectives. It’s also important for companies to understand which ESG raters their stakeholders value the most. That way, companies can focus their engagement efforts with those raters.
Public companies—and a growing number of private ones—can’t opt out of ESG ratings; raters will assess these companies whether they request it or not. That’s why it’s important to proactively engage ESG raters to ensure they are looking at the right information and interpreting it accurately.
ESG doesn’t fall under a single company department. Make sure all relevant parties are at the table—from your sustainability team and corporate secretary to your investor relations and legal teams. That way, you can provide raters with the most accurate information on your company, along with substantive feedback.