Have you ever heard of an ESG (Environmental, Social and Governance) strategy? The chances are you may not have, because it currently isn’t a mandatory requirement for companies in the UK, and very few companies implement one. However, in recent years these strategies have increased in popularity and the term ESG has been spoken about a lot more.
In this post we have simplified this rather complex and sometimes confusing term to help you better understand what it is. We also discuss whether your company should think about having an ESG strategy in place.
ESG is a strategy that companies use to ensure their company’s sustainability and to monitor how what they do affects the environment. It also encompasses how they treat their employees, clients and consumers and how well managed the company is.
Environmental
How green is your company? From whether you recycle to how big your carbon footprint is, more companies are being cautious about how everything they do will have an environmental impact.
Social
Is your company socially aware? The social side delves into exactly what measures companies are taking to protect their employees and look after their wellbeing. This includes going above and beyond adhering to policies such as the Modern Slavery Act 2015 and the Equality Act 2010, which are merely a basic requirement.
The ‘social’ part of ESG extends to the clients companies work with and consumers of their products. How are they also being treated and how is this satisfaction being both measured and improved upon?
Governance
How well is your company managed from the inside? Governance looks at how other policies and procedures are implemented and adhered to across all levels of employment. It also means how you make sure your company carries out proper processes such as audits, taxes and legal matters.
The three areas overlap in some ways as they are interlinked so a balance between them is vital. For example, under governance the makeup of a company’s executive board will have knock-on effects across its management style as well as its environmental impact and social aspects.
There has been a heightened awareness of several global environmental, social and health issues in the last few years. How companies can help the environment, look after their employees and ensure they are doing what is morally, ethically and legally right in many aspects becomes more imperative than ever.
Since April 2022, all publicly quoted companies, private companies and limited liability partnerships with more than 500 employees and a turnover greater than £500 million are now liable to report their ESG. This requirement could see a surge in vacancies and a change in many ways in which a company is run.
The importance of having an ESG strategy in place is becoming more fundamental for many companies as they become more attractive to potential investors. Furthermore, according to a study by Marsh & McLennan, more employees are expressing interest in the companies they work for having one in place and naturally, those with highly satisfied employees have a better ESG performance. Companies with poor ESG can suffer the consequences in terms of high employment turnover and difficulty attracting candidates. If things such as high carbon footprint, bad waste management, an unhealthy equality balance or gender pay gap are made public, this can negatively affect their long term reputation.
Butterfield Mortgages Limited conducted research that found that a quarter of UK investors intend to make ESG investments by 2025 (for those aged 18-34 it was nearly half). And almost a third are willing to accept lower returns if an investment has a positive social or environmental impact. So for those companies seeking investment, having an ESG strategy in place should be high on their agenda.
Some companies’ ESG performances are rated by agencies, the results of which could make or break an investment deal. Companies with good ESG strategies continually outperform those without. A review by Oxford University and Arabesque showed that 88% of companies that focused on sustainability had improved operational performance, translating to higher cash flows. And nearly half of the UK’s 100 biggest companies set targets for executive pay based on ESG measures, encouraging more companies to take it seriously.
The increase in the importance of ESG means more ESG-related roles are on the rise. More than 35,000 ESG jobs were created in 2021, up 7% from the year before. They are very broad and varied across all industries, sectors and levels, from HR to law and from engineering to marketing. Some ESG jobs might focus on specifically analysing a company’s ESG, its sustainability, risk policies, CSR (corporate social responsibility), or to look after employee wellbeing.
Having ESG – especially a strong ESG – is not as simple as it may seem though. DWF conducted a survey of 480 senior executives from across eight sectors around the world about ESG practices. It found that more than half of businesses (52%) say ESG has become more important over the preceding 12-18 months during the 2020-2021 peak pandemic time. 39% said they are re-examining their ESG goals because of the pandemic, while 45% say social trends led them to re-examine their goals.
But it also showed that poor ESG performance is hitting businesses hard. For instance, 59% say they lost work as a result of issues within the business. And some companies found barriers to improving ESG such as 49% saying reducing environmental impact would reduce service to clients.
Of those surveyed, 1 in 5 ranked their company’s performance as weak and more than two thirds say they want to collaborate with professional advisors in sharing best practices. Other findings show there is a lack of a universal standard and set of regulations. There is also no broad agreement on ESG best practice and what it looks like.
It can be agreed that many companies can benefit immensely from a strong ESG if they can find ways to overcome the barriers they face. Kirsty Rogers from DWF believes this should start with the board before establishing a cross-functional ESG leadership group. Hiring ESG specialists and taking heed from companies with strong ESG ratings or sharing best practices are also recommendations.
Culture Shift can help in the social aspect with our Report + Support™ system. When employees are given the opportunity to report unacceptable behaviour – anonymously if they wish – and receive support to put a stop to it and resolve issues, companies’ work culture can be improved. Employees will feel more confident in their employers’ awareness and actions in regards to social issues and problems in their work environment. Contact us to find out more and one of our dedicated team members will be in touch with you!
