Economics/Business

Why is ESG important/gained prominence/advantages/put into practice

The ESG concept , although not a new subject in the market, has emerged as a major trend in business management . Part of this interest is due to the new generations, who are much more aware of the impacts generated by the corporate world.

But do you know what the acronym means and how this agenda can be implemented to show the company’s commitment to social and environmental issues ? In this post, we explain everything you need to know to adhere to the guidelines, check it out.

What is ESG?

ESG is a set of good practices that demonstrate how much a company is socially and environmentally conscious in its management. The term is an acronym in English “ environmental, social and governance ”, which can be translated as “environmental, social and governance”.

In this way, each letter has a practical meaning:

  • Environmental: the letter E refers to organizational practices in relation to the conservation of the environment, that is, its action on issues such as air and water pollution, global warming, deforestation, carbon emissions, among others;
  • Social: the S represents the way the company deals with people, both in the case of employees and the surrounding community. Here, aspects such as protection of customer data, team remuneration, diversity, respect for labor legislation, etc. are considered;
  • Governance: the letter G is related to the organization’s administration and its corporate conduct, covering the relationship with governments and shareholders, anti-corruption policies and the existence of a whistleblower channel.

These three pillars are used as criteria, mainly by investors, to measure whether the company has sustainable practices and whether it generates positive financial, social and environmental impacts, whether or not it is a viable investment option.

In this way, companies that implement ESG demonstrate that their business model values ​​not only profit, but also a greater purpose for the community, making it much more attractive, both for consumers and for potential investors.

But it is noteworthy that companies do not necessarily need to have similar actions in all three pillars. Also, their actions will depend on the context and particularities of each sector and the community in which the organization is inserted.

However, in general, certain aspects of each pillar are usually valued , as we will see below.

Environmental

Some of the criteria required in relation to environmental responsibility are:

  • Waste Management;
  • deforestation policies, if applicable;
  • use of renewable sources;
  • company positioning in relation to climate issues;
  • pollutant reduction and elimination policies;
  • product reverse logistics;
  • negotiation policy with suppliers that adopt environmental responsibility measures;
  • actions to improve and preserve biodiversity, when the organization owns land.

Social

Regarding the social criteria of the ESG, the range is much more open and comprehensive . Two of the issues valued by investors, for example, are people management and the enhancement of human capital.

Thus, points are analyzed such as:

  • turnover rate ;
  • pension plans for employees;
  • level of involvement of employees in the management of the company;
  • benefits and perks offered, in addition to salary;
  • the company’s position on public policy and issues related to human rights;
  • fair wages;
  • training and talent development programs;
  • respect for labor laws;
  • customer relationship management;
  • data protection;
  • corporate policies to encourage diversity and inclusion.

In addition to these issues, another concern is the relationship with suppliers who share the same values . Therefore, it is important to evaluate each partner from the point of view of the ESG criteria, verifying connections with child and slave labor, acting in areas of deforestation, among other aspects.

governance

The governance aspect at ESG focuses on how the company is managed and whether management serves the interests of all parties, such as employees, shareholders and customers.

Thus, criteria such as:

  • financial and accounting transparency;
  • honest financial reporting;
  • corporate conduct;
  • shareholder remuneration;
  • relationship with government entities and politicians;
  • independence and diversity in boards;
  • integrity and anti-corruption practices;
  • risk management .

How did the concept of ESG come about?

The first use of the term ESG happened in a report called “ Who Cares Wins ”, the result of an initiative led by the UN (United Nations) in 2005. 

At the time, 20 financial institutions from 9 countries came together to develop guidelines and recommendations on how to include environmental, social and governance issues in asset management. Brazil was among the active countries.

The report’s conclusion was that the incorporation of these factors in the financial market generated better results for society and more sustainable markets.

But, despite the term having a relatively recent use, the concern with investments in sustainable companies has been around for a long time. Between the 1970s and 1980s, the term Socially Responsible Investing was created , which translated into Portuguese means “responsible sustainable investment”. 

At that time, investment funds began to consider social criteria in decision-making.

Why has ESG gained prominence?

The term ESG has gained greater prominence among companies recently because we are at a time when society values ​​businesses that respect the environment, people and good management .

This change in parameters is mainly a reflection of the new generations, who prioritize conscious consumption and transparent and responsible brands.

In this context, due to the demands of consumers, it was concluded that companies with good practices are more stable and profitable in the long term . As a result, investors and investment funds began to look at ESG criteria before investing their money.

Why is it so important to companies?

From the above, you probably already understand the relevance of ESG for the sustainable development of our planet. 

Therefore, following ESG standards makes your company more competitive in the domestic or foreign market. Being an ESG company indicates strength , lower costs , better reputation and greater resilience amidst uncertainty and vulnerabilities. 

In addition, the new generation is growing with a more latent concern about sustainability allied to economic growth and development. Research indicates that companies that support sustainability actions and are concerned with the environment, quality of life, social and governance fields are the most sought after in the market.

Thus, putting all this data together, it is no longer possible to doubt that sustainability and results can go together, they must be allies so that our planet and society can walk and prosper.

Unfortunately, many leaders from various countries still do not use their power focused on this evolution, because they are at the service of selfishness.

Those who are at the service of selfishness and with power, deal with resources as if they were theirs and do with them as they please, creating an unbalanced cycle, spreading misery, disease and death, among people and all other species. I always say that nature is the essence of the feminine archetype. 

What are the advantages for the company?

Meeting the ESG criteria is directly linked to the company’s attractiveness for investments , however, the advantages of meeting good practices are not limited to this. Below, we list some more benefits of adopting this policy.

financial performance

Adopting more conscientious practices is an excellent way to improve the financial efficiency of the business , avoiding waste and ensuring better use of resources.

And we are not just talking about practices aimed at environmental preservation. Good human capital management , for example, makes employees more engaged, avoiding high turnover rates, which generate expenses. 

brand image

As we have seen, consumers have turned their eyes to more aware and responsible companies, thus, adopting ESG is a powerful marketing tool to strengthen the brand , impacting employer branding .

This recognition is important for both the national and international market, which has rankings to measure the company’s adherence to practices.

investor confidence

Implementing ESG policies is also important for companies looking to invest more. As we’ve already discussed, sustainability and responsibility are becoming more and more important to the investing community.

Thus, companies that do not adopt practices in this regard and do not provide KPIs that prove their actions tend to lag behind.

Consumer loyalty

A study published by First Insight in early 2020 found that Generation Z, born between 1995 and 2010, make their purchasing decisions based on sustainable retail practices . 

Still, the survey found that 62% of this generation’s participants prefer to buy from sustainable brands and 73% expect retailers and companies to become more aware. The survey also shows that they are even willing to pay more for sustainable products.

Employee engagement

Improving the image of companies that adopt ESG does not only reflect on consumers and investors. It is also a powerful tool to motivate and engage employees , especially those from younger generations.

That’s because, these professionals seek, not only for adequate salaries, but also for companies that have a purpose and that do some good for society. Thus, by adopting good practices, the organization retains its talents and manages to win over the best candidates in the market.

How to put ESG into practice?

You’ve already noticed that ESG is a trend that came in full force and that your company should analyze the policies to be part of it, right? But after all, which practices to adopt and how to start? Now, we’ve listed some steps your company can take.

1. Plan a specific work program

The first step in getting started is to understand the company’s current reality in relation to the ESG maturity level. To do so, put on paper all the points where the organization is already operating and create a program of objectives.

Here, it is important to emphasize that the established goals must be achievable and measurable . Still, it is common that companies end up abandoning this type of project over time, so the planning must be solid and followed to the letter.

2. Create a policy in line with the company’s values

It is important that the new policies make sense with the company’s vision and values . Remember that organizational culture is a way of explaining business guidelines, so when choosing an action plan, be consistent with what you believe.

There are many companies that create very nice ESG policies on paper, but they have nothing to do with the brand’s DNA. In these cases, it is clear that it is just a marketing plan , which can discredit the program.

3. Define points on each pillar of the ESG

A company that wants to be recognized by the ESG agenda needs to have at least one focal point for each of the pillars . This focus will serve as a guide and guide for other applied policies.

As we have seen, the organization does not need to have equal actions in all pillars, however, it is important to have, at least, a focus that guarantees that you are looking at all axes.

4. Implement the plan

For the project to be implemented efficiently, it is necessary to align three important factors: people, processes and management systems . This is the base column to ensure changes are made efficiently and with results.

People are the human capital that will act directly in the implementation. This is the most variable feature, so it’s the one that needs the most attention. Processes, on the other hand, are the procedures that must be carried out for the adoption of the planning, thus, they can undergo changes, revisions and adjustments to ensure success.

Finally, management systems are tools that help organize and standardize processes , making implementation more optimized.

5. Measure the results

The management of results also requires special attention, which is why it is important to establish goals that can be measured . The demand created with ESG is precisely the way to show investors the company’s positive agenda.

Therefore, this data needs to be shown clearly and with metrics and indicators that reflect the changes made . Furthermore, with the measurement of results, it is possible to organize information according to international standards.

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