The ABCs of ESG
ESG has become a buzzword in the working world recently. The general public wants it, investment companies want to provide it, and companies are being pushed more and more to focus on it. But what the heck does ESG even mean? And why does it matter?
In the 20th century (and basically since the beginning of mankind), the only measure of success for a business was driven by just one word: profits. The goal was to make as much money as possible, and use whatever means at your disposal to do so. As mankind progressed over the past 2,000 years, we’ve proven to be very creative in finding ways to make a business more effective and efficient – and ultimately, increase our bottom line. The results include exciting developments, such as the technological advancements of the Industrial Revolution and the creation of the Internet. Refining fossil fuels for energy led to the creation of machines that do back-breaking work for us. Unfortunately, these strides also include some disheartening developments, such as slavery and child labor. And the byproduct of this “advance at all costs” methodology is that the human population has not considered the negative long-term effects of our progress.
Fast forward to the world today. Business and technology is still accelerating, and at an exponential pace. The global standard of living has come a long way from historic times – we literally have the world at our fingertips with our smartphones and were able to introduce safe and effective vaccines for a global pandemic just 12 months after its global spread. We can now gather vast amounts of data on just about anything, and connect to anyone else in the world in a matter of seconds. And what that data and connection tells us is that that there are some serious issues in the world that need be solved now. As a result, the concept of ESG was introduced and has become increasingly popular in recent years.
You’re probably sick of the history lesson by now, so let’s jump into what ESG is and what it means to the business world.
What does ESG stand for?
ESG is an abbreviation for “Environmental, Social, and Governance,” specifically as it relates to a business, government, not-for-profit, or other organization. Let’s break down those 3 components a bit:
Environmental focuses on the impact of a business on the physical and natural world. The most urgent need is to mitigate a future of natural disasters as a result of climate change (i.e., global warming) due to toxins produced by mankind. There are many ways to do this, including the reduction of greenhouse gas emissions (e.g., reducing fossil fuel energy sources and converting to renewable energy) or reforestation (more trees = less greenhouse gases). However, the ‘E’ of ESG can relate to other environmental efforts as well, such as the reduction of toxic waste or waste water.
Social focuses on equality of humankind. We all live in this world but in no way are we equal; recent movements have shown systemic racial inequality runs rampant and we’re still trying to end the disparity in pay between men and women. The creation of recent initiatives such as Diversity, Equity, & Inclusion (DEI) are focused on correcting those inequalities, and included within the ‘S’ of ESG.
Governance focuses on the areas of oversight of a business and how processes and policies can be implemented to hold executives accountable to their business decisions and ensure that a company acts in the best interest of its employees, investors, and other stakeholders. Initiatives that focus on making executive pay reasonable and/or tied to valuable targets (which could include environmental or DEI goals), and reducing corruption or inappropriate political activity would fall under the ‘G’ of ESG.
Why should I care?
You may be wondering why businesses have had so much focus on ESG recently. The answer is that younger generations place more importance on issues related to ESG than generations before them. With the introduction of the Internet and constant advances in technology, younger generations have benefitted from insight into the world earlier in life than generations before them - making it easier to see injustices in the world and therefore feel the importance of correcting those wrongs.
As I mentioned earlier, the best way to get things done is through business and investment. Many people like to help out of the goodness of their hearts, but money continues to be the main motivator. In response, ESG was introduced to the business world, where businesses must now focus on their impact in a number of humanitarian areas.
Younger generations of investors and customers tend to set less value on a company’s profits, and more value on its focus to improve the world. And the business world listens to investors and customers because those are the people that drive their success. This is seen as more countries have begun introducing disclosure requirements around climate change, with the USA working to finalize its own during 2022.
For now, companies can continue to ignore the focus on ESG if they like. However, as it becomes more of a priority in the coming years, not leaning in may lead to lower investment appeal, fewer customers, and higher costs due to regulatory penalties, with a final result of that company’s demise.
What aspects of ESG do you see as a high priority?
