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ESG was once a fringe practice seen in niche industries of the business sector. Yet, today’s ESG frameworks are quickly becoming the new standard across almost all industries.
According to the Harvard Business Review, 90% of S&P 500 companies now issue an ESG report of some kind. Meanwhile, McKinsey & Company found that environmental initiatives (the “E” in ESG) can reduce resource costs and can achieve up to a 60% improvement in operating profits.
It’s evident that ESG frameworks, although not mandatory for all companies, are a necessity for maintaining a competitive edge and boosting profits.
This article aims to tackle the specifics of ESG, including what each of the three key pillars of ESG frameworks entails, who is required to comply, and what benefits and impacts ESG presents.
Let’s dive in.
What is ESG? The 3 Key Pillars to Know About
ESG (Environmental, Social, and Governance) is a set of standards for companies that govern the company’s behaviors and investment choices. The ESG framework can be divided into three main pillars:
- Environmental: In the environmental pillar, companies are expected to complete data reports on key sustainability issues, including greenhouse gas emissions, biodiversity loss, deforestation, reforestation, pollution, energy efficiency, and water management.
- Social: In the social pillar, companies are expected to report on various social issues in the workplace, such as employee health, workplace safety, working conditions, equity, diversity, inclusion, customer satisfaction, and employee engagement. The social pillar also plays a role in how companies are expected to respond to humanitarian crises.
- Governance: In the governance pillar, the reporting expectations placed on companies have to do with corporate governance, including the prevention of bribery and corruption. Additionally, governance can include establishing a board of directors for diversity initiatives, strengthening cybersecurity and privacy practices, and creating an effective management structure.
Who is Required to Comply with ESG?
In terms of which companies need to comply with ESG standards, it varies around the globe.
For example, in the U.S., the Securities and Exchange Commission (SEC) governs the Climate and ESG Task Force to help develop ESG initiatives and proactively identify ESG-related issues, such as misconduct on behalf of the companies subject to ESG requirements.
The SEC requires all public companies to disclose any information on ESG-related risks to stakeholders.
As of May 2023, private companies are not mandated to follow the same ESG disclosure practices as public companies. However, just because ESG reporting is not mandatory for private companies, voluntary reporting can still come with key benefits.
The United Nations Sustainable Development Goals (UN SDGs) provide a framework for both ESG goal-setting and reporting. Despite the use of this framework being entirely voluntary, more than 18,000 companies around the globe participate in the UN’s Global Compact, which includes a variety of ESG-related initiatives.
What are the Benefits & Impact of ESG Initiatives?
Whether your company is subject to mandatory ESG reporting or not, following an ESG framework can come with many vital benefits for public and private companies alike.
These benefits include:
- Increased Investor Attraction: At its core, ESG places investors and stakeholders as a central focus within initiatives. This makes companies that adhere to ESG reporting requirements more appealing to potential investors, as investors are becoming more cognizant of the impact of and interactions between sustainable business practices and long-term investments. According to a 2022 study, roughly 48% of investors are interested in sustainable investing.
- Enhanced Reputation: Attracting more investors is certainly essential for both public and private companies — but what about attracting and retaining customers? The average consumer is becoming more aware of the importance of ESG, especially within the environmental and social pillars, causing consumers to place greater expectations on the companies they work with. Those companies that value ESG frameworks and initiatives are, as a result, more likely to have a positive reputation among consumers.
- Improved Risk Management: Each of the ESG pillars represent a specific set of risks that companies must face and address. Implementing a clear ESG framework and strategy can help companies not only comply with any mandatory ESG requirements but also improve their approach to risk management in the modern business landscape. For example, climate change (environmental) and geopolitical conflicts (social) can cause major supply chain disruptions. Having a clear outlook on these risks can be the key to overcoming the challenges they present.
- Boosted Financial Performance: Following an ESG framework can not only attract more investors and enhance a company’s overall reputation — it can also help your company track key metrics that can boost your ROI and improve your bottom line over time. For instance, as part of a sustainability ESG initiative, a company may decide to go paperless and install energy-efficient upgrades in its office space. In turn, the company not only adheres more closely to ESG standards but also reduces operational costs associated with energy and administrative tasks.
- Future Compliance Preparation: Though ESG is not mandated across the board at this point in time, regulators are working to create a more global standard for ESG compliance and reporting. As such, implementing an ESG framework now can be the key to staying ahead of the regulatory curve and maintaining a sharp competitive edge if and when the global standardization of ESG requirements comes to pass.
In terms of the impact of ESG on public and private companies, there are both positive and negative impacts to keep in mind when implementing an ESG framework.
On the positive side, ESG helps companies to adequately prepare for the future. Regardless of political or personal opinions, the three pillars of ESG are becoming more prevalent challenges within the business sector. Taking the necessary steps to proactively address these challenges via an ESG framework can be the key to establishing strong operational resilience and business flexibility in the years to come.
However, on the negative side, ESG frameworks do come with the initial challenge of implementation.
Depending on what resources and support a company has in place, an ESG implementation can be either complex or simple. Trying to handle all the necessary ESG requirements alone can overburden a company, causing a company’s staff and resources to be overextended.
By contrast, working with a strategic partner — like Aprio — that can provide the necessary resources and support needed for an ESG implementation can help companies to overcome this hurdle with ease.
Empower Your ESG Journey with Aprio
To find success with your ESG initiative, finding the right strategic ESG partner is crucial.
At Aprio, we offer the comprehensive guidance and services your company needs to excel at ESG, regardless of whether your company is public or private.
Our ESG services include:
- Starting Your ESG Journey: Aprio helps you hit the ground running with stakeholder identification, materiality assessment, and prioritization services. Plus, Aprio also assists with GHG emission calculations for scopes 1, 2, and 3.
- Setting ESG Goals: Having clear goals in mind is essential for a successful ESG framework. Aprio guides your company through the process of ESG target-setting and benchmarking to ensure you are prepared for the future.
- Improving Your ESG Roadmap: Creating a well-defined roadmap can be a vital piece to your overall ESG strategy. Through a partnership with Aprio, our team can help you identify action items and resources, as well as create accurate timelines.
- Enabling ESG Reporting: Reporting is arguably one of the most important and complex aspects of ESG. With Aprio, you can simplify your processes for sustainability reporting, GHG inventory, benchmarking matrix, and climate risk management plans.
Contact the Aprio ESG team today to get started!
