The ‘ESG’ Phenomenon: Finding New Ways to Gauge Business Success
Evolving Values Drive Fundamental Change in Performance Metrics
In the business world, measurements of success traditionally have focused on dollars and cents, profit and loss, boom or bust.
But a new sensibility is taking root today, redefining the way American business gauges its performance and introducing a new acronym to the corporate lexicon.
Environmental, social and governance metrics are quickly transforming the way businesses do business and measure their success. In essence, the ESG movement adds a new dimension to the measurement of business success, introducing the concept of a corporate world redefined by social values.
To be sure, financial results and solid fundamentals remain vital benchmarks of business success, but many companies today are adding ESG metrics as key elements in their strategic plans, and in many cases, they are being pushed in this direction by boards of directors, employees, consumers and regulators.
But what is ESG and why has it taken a prominent place at the top of corporate agendas, from large multinational corporations to locally owned companies?
How ESG Started
In short, ESG is a broad values-based set of practices that is redefining business management and investing. For companies that are publicly traded or subject to regulation, adherence to ESG practices is increasingly becoming an imperative.
ESG is essentially a framework to help stakeholders understand how an organization manages any number of risks and opportunities as they relate to environmental, social and governance measures. While ESG is normally used in the context of investing, its concepts have gained traction in the broader business marketplace.
The ESG movement traces its roots to the 1980s, when some businesses began recognizing the need to manage pollution and improve employee labor and safety standards while still pursuing economic growth.
In the 1990s, this phenomenon grew into a movement for corporate sustainability in which management teams incorporated business practices that went beyond legal requirements. By the turn of the century, this evolved into a concept now known as Corporate Social Responsibility (CSR).
The CSR movement pushed organizations to look at how they could respond to various social issues. For instance, management teams sometimes looked at nonprofits their employees participated in and worked to enhance those efforts. In the last decade, ESG has grown out of CSR into a proactive movement to improve the environment and society.
Adoption of ESG agendas is driven in large part by pressure from consumers, investors and regulators, moving business leaders to address challenges like climate change and racial inequity with data, metrics and goals. Essentially, employees, consumers, governing bodies and global communities are pushing organizations to do business differently.
Businesses want to remain competitive and are compelled, in many instances, by regulations and new industry standards. But the adoption of ESG frameworks is largely voluntary, especially for smaller and medium-sized businesses.
The ESG Framework
Environment — The environmental component of ESG considers how an organization impacts the environment. In addition to measuring how it directly impacts the environment an organization may also evaluate how others in their supply chains impact the environment to produce and consume the products and services that the organization sells.
Social — Organizations often look at the social component of ESG through the lens of how they treat employees, using traditional metrics such as employee compensation and employee engagement with the organization. However, this social pillar also looks at how the organization impacts the communities in which they operate. Diversity initiatives often are key components of the social pillar when organizations implement ESG practices.
Governance — The governance component focuses on how an organization is managed and led by those in charge and how it promotes transparency and accountability by those who are in leadership roles.
Specific trends within the ESG framework include cybersecurity, supply chain resiliency and employee compensation tied to ESG performance. Other trends include disclosure of ESG integration, updating the organization’s mission to reflect desired performance, and reducing an organization’s carbon footprint.
If your business has begun implementing an ESG framework or has been asked to engage with a customer or supplier’s ESG initiative, we’d like to hear from you.
If you have questions about how the growing ESG trend in business metrics may impact you, contact your Adams Brown advisor.