The Growing Importance of ESG

Environmental, social and governance (ESG) factors play an increasingly important role in companies’ value as shareholders, customers and employees make it a priority.

“There’s no ability to shy away from ESG,” said Brian Lehman, Head of Commercial Banking’s Green Economy team at JPMorgan Chase, which provides dedicated services and expertise to companies that produce environmentally friendly goods and services or focus on environmental conservation. Consumer awareness and investor sentiment on these issues are on the rise. “If you're a public company, it's becoming less expedient politically to not demonstrate a tangible commitment to ESG,” he added.

But how can your business demonstrate and measure its commitment to these factors? The first step is to understand the framework for ESG.

What Is ESG?

ESG is the concept that many factors outside traditional financial analysis can be used to assess a company and its performance. Each letter represents a different area to examine.

• Environmental: carbon emissions, waste management, water usage, and energy efficiency, for example
• Social: customer satisfaction, data privacy, workplace health and safety, and employees’ healthcare access, among others
• Governance: compensation practices, board composition, internal control processes, lobbying, and so on

Companies may outline or disclose their ESG efforts in various documents—from corporate responsibility publications to annual reports. JPMorgan Chase published its first annual report detailing the firm’s ESG work in 2015. The firm has issued annual reports every year since.

ESG Considerations

ESG is unique to each company. “Ultimately, ESG is something you have to look at in the context of the specific company: What is important to them and core to their business, driving, fundamentally, their long-term success?” said Marisa Buchanan, Global Head of Sustainability for JPMorgan Chase.

There are a few key factors to consider:

• Be specific: What does ESG mean for your business? Driving an inclusive recovery, fueling business growth and accelerating sustainable climate solutions are areas of focus 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, while a brewery might direct its efforts toward conserving natural resources.
• Look at internal versus external ESG: Consider the ESG efforts both within and outside your company. Internally, JPMorgan Chase is aligning key sectors of our financing portfolio with the goals of the Paris Agreement. Externally, we have shared our aim to finance and facilitate more than $2.5 trillion through 2030 to advance long-term solutions to address climate change and contribute to sustainable development, including $1 trillion for green initiatives.
• Tie ESG to your company’s value: It’s important to think about ESG in terms of risk management and value creation. ESG’s value—especially for shareholders—is its connection to how you do business and impact your communities, employees and finances. “Why does this make you a better, more attractive company that is going to deliver value in both the short and long term?” Buchanan asked.

ESG Ratings

Hundreds of ESG raters use publicly available data to assess your business and share the results with the public and investors. ESG disclosure also gives you the chance to tell your company’s story. While you can’t directly control your ESG score, you can shape your company’s narrative by connecting your core ESG values to how you do business.

“While ESG raters are a factor to consider, we look to a variety of stakeholders to provide input on our ESG strategy,” Buchanan said.

ESG Is Becoming the New Way to Do Business

Although there’s a long way to go, “I think ESG strategies are increasingly trending toward business as usual,” Buchanan said.

“This could be a 30-year process,” Lehman said. There are staggering differences between where we were a few years ago and where we are now. “There’s such a groundswell of support in policy, in the private sector, globally,” he said. “There’s so much to be optimistic about that didn’t exist even 12 months ago.”

What’s next in ESG? “Climate change is increasingly becoming an outsized portion of the ‘E’ bucket,” Buchanan said. “So many people in communities around the world are seeing the greater physical impacts of climate change, whether it’s around wildfires, flood, drought. That’s prompting greater public awareness and desire for policy response.”

Diversity, equity and inclusion has also become a growing focus for organizations. A more widespread recognition of racial wealth disparities has prompted businesses to play a role in helping address those issues—not only in their own workforce but in the communities they serve.

“We also have a younger generation that’s growing up and saying, ‘We’re scared about our future. We need change,’” Buchanan said. “I don’t think you can underestimate the impact of those things.”