Why ESG Matters In 2022 And What You Need To Know
You’ve probably seen the ‘ESG’ term pop up on your LinkedIn feed or on an annual report that you’ve recently reviewed. But what is the significance of this term and why does it matter in 2022? ESG, to put it quite plainly and simply, is a term that encompasses a set of standards that a company’s stakeholders, be it investors, customers, or employees, uses to assess its impact on environmental, social, and governance initiatives. More than ever, companies are assessed for how well they navigate challenging environmental and social dilemmas within the context of a world that is rapidly changing due to an omnipresent climate crisis and widespread awareness of important social and governance issues.
Why The ‘E’ in ESG Matters
When we think of ESG, we often think of the ‘E’ in the abbreviation – the environmental initiatives of a company and how it has set out to address issues centring around sustainability and climate change. So, let’s get to the point then. Why does ESG matter so much in 2022, as opposed to, let’s say, 10 or 20 years ago? If you’ve been following current events, you’ll know that there’s an impending climate crisis, marked by a global rise in temperature of 1°C (33.8°F) that has resulted in a multitude of events that include rising sea levels, ocean acidification, and a record number of extreme weather occurrences.
Much of this can be attributed to human activity over the past 50 years, and the time to act is now, otherwise, humanity faces a very bleak and uncertain future. If we’re unable to curb a rise in global temperatures to 1.5°C(33.8°F) by taking climate action seriously, then we’re going to experience heat waves that are going to be 2.6 times more severe, a doubling of the loss of plant and vertebrate species, uninhabitable low-lying coastal communities and island nations, and near-complete extinction of coral reefs.
How Companies Are Taking Action
Many organisations and business leaders have responded to this new reality by adopting initiatives that strive for carbon neutrality, investing in carbon offset programs, or implementing internal ESG initiatives that place an emphasis on environmental and sustainability goals. For example, companies such as HSBC, Nike, and Dell have pledged to achieve carbon neutrality, whereas companies such as Google, have invested heavily in carbon offset programs to supplement their existing carbon reduction efforts to achieve net-zero emissions. If companies aren’t investing in efforts to reduce their corporate emissions, they’re going to face market transition risks that are affecting 80% of the world’s largest companies. For example, oil and gas operators in Alaska are facing challenges stemming from thawing permafrost that could result in having their critical infrastructure damaged to the point where it could have serious financial consequences for these companies.
Benefits of Environmental Initiatives
In addition to avoiding market transition risks, there are numerous benefits to environmental initiatives and investments. If a company takes measures to reduce its carbon footprint and improve the sustainability of its operations, then it can potentially experience top-line growth, cost reductions, fewer regulatory and legal interventions by governments, and greater productivity. Top-line growth occurs when companies demonstrate their commitment to environmental and sustainability initiatives, which results in preferential treatment from external stakeholders such as governments and consumers. For example, many federal, state/provincial, and local governments are more likely to award contracts to companies that prioritize green initiatives, as an organization’s environmental credibility is becoming more of a consideration for contracts, grants, and other investments.
The cost reductions element is one that seems the most obvious – for example when FedEx planned to convert its fleet of vehicles to hybrid or electric engines, it seemed like a costly proposition at first. However, with only 20% of its fleet being converted, FedEx was able to save more than 50 million gallons of fuel. These kinds of actions don’t just have financial benefits – companies that demonstrate a commitment to reducing their emissions are often less likely to face strict regulatory measures, legal interventions, and penalties.
Embracing Positive Social Change
A global COVID-19 pandemic forced companies to act quickly and decisively to keep their workers safe and productive. Companies enacted sweeping changes that addressed the social component of ESG by offering their employees more flexibility at work by implementing remote or hybrid work models. By giving their employees the opportunity to work from home either temporarily or even permanently, companies created, in many instances, a more equitable workplace that allowed employees to spend more time on important priorities outside of work, enjoy more opportunities for continuous learning, and focus on improving their wellness and mental health. This change has been so profound and impactful, that in the U.S., nearly 40% of workers surveyed admitted that they would be willing to quit their jobs if they were no longer provided flexible or remote working options
In response to this pandemic, some organizations went a step further to address the societal challenges brought on by COVID-19 by transforming their operations to produce critical supplies such as hand sanitizer and masks to support healthcare systems around the world. Other examples include the private sector stepping up to help Ukrainian refugees fleeing the current conflict. Companies such as Airbnb have, for instance, worked with hosts to house up to 100,000 refugees while temporarily waiving their booking fees. Overall, since the start of both the pandemic and the conflict in Ukraine, companies have overwhelmingly invested in social initiatives that have had a direct and positive impact on those that may not even necessarily be a part of their target markets, but what is the benefit of these actions?
The benefits of social initiatives and investing can include, according to McKinsey, a boost in employee motivation and the ability to attract more talent due to greater social credibility, which can then subsequently create an uplift in productivity. Also, as we’ve discussed with environmental investing and initiatives, companies that are engaged in social or impact investing are more likely to face legal and regulatory challenges by governments and other stakeholders. Ultimately, it pays off for companies to embrace positive social change.
What About Governance?
What about the ‘G’ in ESG? The governance component pertains to how companies conduct their operations with respect to accountability, transparency, and fairness. When Volkswagen was embroiled in a massive multi-billion dollar emissions test scandal in 2015, the company faced financial repercussions that amounted to $35 billion – this was direct a result of a lack of governance and oversight that lead to the company taking costly shortcuts to circumvent environmental regulations. Not only did it hurt their bottom line, but it also dealt a serious blow to their brand and their reputation in Germany and abroad.
As evidenced in the case of companies such as Volkswagen, or more recently with Facebook’s whistleblower scandal, the governance component to ESG can’t be overlooked because it leads to lasting repercussions. These can include erosion of goodwill and trust between companies and their customers, challenges retaining and hiring employees, a decline in top-line growth, and greater costs due to stricter regulatory restrictions placed on companies that lack meaningful governance initiatives.
Why Good Governance Is Worth It
On the flip side, if companies take the the governance criteria of ESG with some degree of seriousness, the benefits experienced can be numerous and long-lasting. For instance, a 2019 study from S&P Global Marketing Intelligence found that firms that focused on enacting governance initiatives, such as creating more equitability between male and female C-suite executives, were more likely to be profitable and have the ability to generate excess profits. There are other benefits beyond just ones that are just financial, and many of these parallel what we’ve already discussed with environmental and social initiatives, which includes top-line growth from both B2B and B2C consumers, greater strategic freedom through deregulation and increased government support, and an uplift in productivity.
Putting It All Together
When companies prioritize their ESG investment and initiatives, they experience a wide range of short and long-term benefits that can include an improvement to their brand equity and reputation, more cooperative relationships with governments, a stronger ability to retain and attract talent, and of course, financial benefits stemming from cost reductions and top-line growth. From a climate crisis to a conflict that threatens global and market stability, implementing an ESG framework and investing in initiatives that create positive environmental, social, and governance changes can undoubtedly help firms weather the uncertainties of today and tomorrow.
Adopting ESG initiatives and policies doesn’t have to be difficult. Your company needs to first identify where it needs to make improvements with regard to its environmental, social, and governance goals, conduct an assessment that includes key stakeholders such as investors, board members, employees, and customers, develop a strong understanding of ESG standards, frameworks, and policies, and allocate resources to programs and investments accordingly. And now, it’s easier than ever to enact and track your ESG initiatives with a wide range of solutions available to both individual investors and organizations.
At billie, we created My Contributions to address the challenge of incentivizing, tracking, and reporting on internal environmental and social initiatives with our user-oriented ESG software. Organizations can create company-wide planet or people-oriented challenges that use a unique system of gamification to encourage and engage employees in these initiatives. For example, if your environmental goals include reducing plastic waste and your overall carbon footprint, you can create customized challenges that reward employees for eliminating plastic straws or for taking public transit to work instead of driving.
When your employees complete these challenges, they’re rewarded with points which can be accumulated to redeem awards at fixed intervals. These rewards are entirely customizable and can include a lunch with the CEO or even a tree planted in their name. In terms of reporting, we have a detailed and user-friendly analytics dashboard that allows you to export an annual sustainability report so that you can successfully identify and track areas that need improvement within your ESG framework.
Overall, with the tools and resources we have today, implementing an ESG framework should be a streamlined and worthwhile process, especially when you factor in the overwhelming benefits of adopting environmental, social, and governance policies and initiatives. More importantly, we’re at a point in time where investing in environmental policies and initiatives is no longer a choice, but a necessity. If organizations, governments, and individuals band together to enact meaningful changes, then we can collectively preserve a planet that needs us as its caretakers. Because, in the wise words of Sir David Attenborough “There is no going back – no matter what we do now, it’s too late to avoid climate change and the poorest, the most vulnerable, those with the least security, are now certain to suffer.”
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