ESG has become a buzzword in the corporate world. The climate is changing at a rapid pace, natural disasters are on the rise, and younger generations are prioritizing companies that they feel align with their values. Since we are all about Making your Merch Match your Mission, we figured we should talk about the ins and outs of ESG and what it all actually means.
How did ESG become the pivotal force that it is today?
The term was coined back in 2005 after major financial institutions partnered with the UN and the International Finance Corporate to recognize ways to incorporate environmental, social and governance factors into financial markets. Momentum was growing around sustainable business practices, and ESG evolved as a means to quantify and create parameters for the well-intentioned but ambiguous world of business sustainability.
Environmentally and socially conscious business leaders have been considering ESG factors for quite some time, but now it has become common knowledge that, morality aside, failing to address the deterioration of our environment and to prioritize workers and consumers is not a profitable long-term business strategy.
So, what is ESG?
Standing for Environmental, Social and Governance, ESG refers to three categories of performance that companies report on to demonstrate their efforts in these areas to all stakeholders. This includes investors, customers and employees.
Companies do this through ESG frameworks which serve as a means to measure and calculate a wide range of metrics across different topics. Because different industries have different impacts and considerations across ESG, there are multiple different frameworks that companies utilize depending on their needs. Some focus primarily on climate concerns and environmental sustainability while others include further measures regarding issues such as social and human capital.
What kind of factors make up ESG reporting?
Let’s go through the 3 categories to get a clearer picture of what ESG efforts can look like.
Perhaps the most common mechanism of ESG that comes to mind is greenhouse gas emissions reporting and decarbonization. What does a company’s energy usage look like? How about waste and toxicity? If they are producing a product, where are their materials coming from? What tools are they using to mitigate their footprint? With governments setting targets to reach carbon neutrality, what do different companies' game plans look like to reach these targets in time?
Social metrics can be more difficult to quantify, but they are certainly no less important. Social considerations can include a high regard for the health and safety of its employees, DE&I programs, and living wages for employees. Additionally, external factors such as a business’ relationship with its community can also play a role.
The third letter refers to the ways in which a business is run. A company that is faring well in the realm of governance is ethical in that they use transparent accounting, encourage shareholder engagement and have diverse leadership. Essentially, governance refers to responsible and inclusive business conduct.
ESG and the future
Shareholder activism regarding ESG increased in 2021 as the public demanded corporate boards and government leaders to develop actionable climate plans and diversify their boards, with this trend expected to increase this year. A new board has also been developed to streamline disclosure standards across reporting frameworks to better hold companies accountable and understand how they fare against one another.
The rapid growth of ESG over the past few years shows the power that consumers and the public have to make a difference in the world. If we collectively demand it, business responds. Continuing to put pressure on corporations to adopt ESG best practices and demanding transparency through reporting will give businesses no choice but to shift priorities to give people and planet just as much attention as profit.
Take a minute to think about the social and environmental issues that you care the most about, and find out how your favorite businesses are faring up. As we’ve talked about before, the B Corp community is a great way to ensure you are supporting business that upholds these values. All certified businesses get a score in these various categories (check out ours here!) and you can see the data for yourself.
If you own a business, what issues are you prioritizing and what do your ESG efforts look like? Have you checked in recently with your customers – what do they prioritize?