ESG investing – also referred to as sustainable or socially responsible investing – is when investors are looking for companies to demonstrate a real commitment and strategic approach to its environmental, social and governance responsibilities.
*Of course, this is in addition to the traditional financial factors considered when choosing where to invest.
What does ESG stand for?
A business’s ESG – Environmental, Social and Governance – measures its impact in these three areas and demonstrates its standards of transparency and accountability.
It’s now something that investors take very seriously, with two-thirds taking ESG standards into account when deciding whether to invest in a company, according to the CBI.
This makes ESG not only good for sustainability, but good for business too, with the potential for long-term growth.
An ESG strategy shows a business is reducing risk and future-proofing itself against further challenges by implementing sustainable practices.
#1. Environmental
The environmental aspect of ESG focuses on how the business minimises its impact on the environment.
This includes its supply chain, raw materials, emissions and other activities involves in producing goods or services.
Examples of good practice:
- using renewable energy sources to reach net zero target
- developing greener products and services
- reducing or eliminating waste
- switching to sustainable packaging
- reducing carbon emissions by using electric vehicles to transport products
#2. Social
The social aspect of a business’s ESG focuses on its workplace culture and how it impacts wider society.
Those businesses which invest in fair and equal pay and conditions for their staff, as well as workers across the supply chain, while also being involves in community initiatives, score highly.
Examples of good practice:
- ensuring safety of products
- maintaining standards of data security and privacy
- ethical labour practices across the supply chain
- supporting wellbeing, diversity and equality through employment policies
- investing in local community projects
#3. Governance
An ESG covers governance in the decision-making, reporting and logistics of running a business.
Ethical behaviour and transparency with stakeholders are also key.
Ensuring good governance in a business can appeal to investors and the supply chain.
Examples of good practice:
- honest, accurate reporting to stakeholders
- accountability regarding risk and performance
- transparency regarding pay structure
Why should smaller companies embrace ESG?
Not all businesses are looking for investment, but adopting an ESG strategy can still reduce risk, lower costs and improve reputation.
Having an ESG indicates transparency as well as future planning focused on sustainability, fairness, diversity and making ethical business decisions.
It also helps to retain existing employees, while attracting new ones. Modern employees tend to look for more sustainable employers with a diverse and inclusive workplace culture and wellbeing support.
As well as attracting staff, improving a business’s reputation through its ESG can also help to attract customers.
Generation Z consumers in particular are willing to pay more for products or services from a greener, more ethical brand.
And according to research by Charles Stanley, 48% of investors want to increase their ESG investments over the next three years.
Why is ESG important?
Investing in ESG aligns value-driven investors with their decisions, by supporting companies that have strong ESG practices and avoiding those that do not.
A business with strong ESG credentials is seen as more profitable and risk averse in the long term.
The data obtained in a company’s ESG report can be used to apply a score that summarises its overall performance regarding sustainability. This can be used to find out the value of investing in that company, in terms of its ethical and financial value.
An ESG rating shows investors they are financing a business that takes climate change and the need to reduce waste and emissions seriously, while also serving the community and valuing and protecting its workforce and suppliers through making ethical choices.
For companies who rate poorly regarding ESG, they may find this puts off potential investors, as it will potentially reflect badly on them.
Just Capital, a platform for measuring and improving corporate performance in the stakeholder economy, has created a list of companies which prioritize stakeholders (not just shareholders), called Just 100. This group has outperformed the market.
Paying a fair, living wage, creating jobs, workforce retention and training, ethical leadership, emissions reduction and pollution control, are among the factors used to identify the 100 top-performing companies across all industries for 2023.
These companies included Apple, Microsoft, Ecolab Inc and Pepsi. Being included on this list makes companies instantly more desirable in terms of investment, employment and also in the eyes of consumers.
Reputation can make or break a business – and showing commitment to sustainability can help to raise the profile of a company in the eyes of all shareholders, be they financial, social or environmental.
