The 3 Big Reasons Why Your Company Should Care About ESG
ESG (environmental, social and governance) strategy is not a niche or a fad.
McKinsey reports that more than 90% of S&P 500 companies now publish ESG reports, as do approximately 70% of Russell 1000 companies. Companies that pay attention to ESG factors do not experience a drag on value creation—quite the opposite.
If your company does not have an ESG strategy yet, you miss significant opportunities for growth. You might also expose yourself to higher risks of regulatory scrutiny, stakeholder backlash and market disruption.
With the right technology and solutions, businesses can achieve their ESG goals effectively and efficiently. Technology can enable you to measure your performance and engage with stakeholders. In this article, we will explain why ESG matters for your business.
What is ESG explained in simple terms?
ESG can be defined as environmental, social and governance factors that measure a company's sustainability and ethical impact.
To be more specific, ESG is a common way to evaluate how a company performs across different aspects. These aspects may directly or indirectly impact a company's sustainability and ethical impact.
For example, environmental issues include how a company affects the natural resources and environment. Social issues include how a company interacts with its stakeholders, such as its employees, customers, suppliers and communities. Finally, governance issues include how a company is run and controlled, such as its board structure, executive compensation, shareholder rights, business ethics and transparency.
ESG is not just a moral or ethical concept. It is also a financial one. ESG can help investors and stakeholders understand how a company manages the risks and opportunities created by changing environmental, social, and governance conditions.
What is the Difference Between ESG & EHS?
ESG stands for Environmental, Social, and Governance, while EHS stands for Environment, Health, and Safety.
ESG principles and EHS refer to different aspects of corporate responsibility. The ESG approach is focused on future planning and policies to align with environmental, social, and governance demands. EHS is more about the operational function of a business and reporting on current practices.
EHS policies and practices aim to prevent or mitigate harm by ensuring compliance with environmental criteria and laws. Compliance with EHS regulations is mandatory, but companies can choose whether or not to adopt ESG policies.
In terms of implementation, EHS policies focus on environmental protection (such as reducing emissions) and employee safety to avoid penalties. In contrast, ESG strategies aim to make positive changes, such as improving working conditions and increasing diversity.
Why is ESG More Important than Ever? 3 Big Reasons For Your Business
ESG considerations are on the rise, especially in the Oil & Gas, Petrochemical, Mining, and Shipping industries. For example, Deloitte reports that even though the shipping industry represents only 1.7% of global greenhouse gas emissions, companies are taking several actions to reduce their carbon footprint out at sea. Here are the three big reasons why these businesses are now focusing on ESG:
1. Competitive advantage
ESG can help you gain a competitive edge by attracting investors, customers, and talent who value sustainability and ethics. ESG can also help you tap into new markets, products and services that address environmental and social needs, such as clean energy, circular economy or social impact investing.
According to Bureau Veritas, companies that engage with their local communities can deliver a win-win outcome that supports their ESG goals and provides long-term value creation. By offering sustainable investing, you also give customers a reason to invest in your business.
2. Risk management
ESG can help you anticipate and comply with evolving regulations and standards on environmental and social issues, avoiding fines, lawsuits or reputational damage.
For example, the US Securities and Exchange Commission (SEC) is considering new rules that would require more detailed disclosure of greenhouse gas emissions. To comply with such regulations, companies can tap into the latest decarbonisation technologies such as Magellan X's ecoMax software to measure and report ESG performance, track progress, identify gaps and opportunities, and communicate impact to their stakeholders.
ESG can stimulate innovation when companies invest in new technologies that reduce environmental impact or improve efficiency.
Andrew Poreda, an ESG research analyst, shares that ESG investing will likely encourage many oil and gas companies to spend more money on research and development (on technologies involving AI, machine learning, renewable energy, and more), which will enable them to survive even when the world transitions away from fossil fuels.
In addition, technologies like SOL-X, a connected worker platform, contribute to innovation by reducing paper waste and ensuring safety compliance.
Are There Disadvantages of ESG?
While ESG practices have clear benefits for the company, there are also some disadvantages.
One downside is the prevalence of "greenwashing," which can make it challenging to identify genuinely sustainable companies. Many companies use dishonest marketing tactics to persuade consumers and investors that they have a positive impact, making it the investor's responsibility to research public records and evaluate the company's sustainability.
2. Focusing only on compliance
The compliance-oriented approach is when companies only highlight their adherence to regulations and critical issues in their ESG programme. This approach gives an impression of reactivity and a lack of initiative to surpass the minimum requirements.
Instead, companies should showcase proactive measures to get a competitive advantage and establish themselves as ESG business leaders. Companies must explain their sustainable practices in regions with solid regulations to gain recognition for their high operating standards.
3. Difficulties in measuring international ESG performance
Unfortunately, it can be difficult for companies to assess their ESG performance across a global benchmark. Despite the vast amount of other ESG disclosures and data, there are data quality challenges in different regions, particularly emerging markets.
For example, while sustainability metric declarations by companies in the S&P 500 index have risen from 20% to over 80%, Asia still lags with varying sustainability disclosures across countries. There are also variations in corporate governance practices within regions such as China and Taiwan.
How to Realise Your Company’s ESG Strategy?
According to McKinsey & Company, companies can realise ESG goals in these ways:
1. Mapping the business model against each ESG dimension
ESG mapping is essential for organisations to analyse and improve their performance.
Effective mapping requires a thorough examination of how an organisation's business model aligns with each ESG dimension (environmental, social, and governance). This analysis should examine how the organisation's activities, products, and services impact each dimension and identify gaps between current performance and desired outcomes.
Once the analysis is complete, organisations can use the insights gained to develop a plan for improving their ESG performance, and at the same time, enhance their reputation, reduce risks, and create long-term value for stakeholders.
To facilitate ESG mapping, companies can use an ESG analytics platform like ecoMax for comprehensive data analysis, near real-time monitoring, benchmarking, and stakeholder engagement capabilities. It enables organisations to make data-driven decisions to enhance their ESG performance and create long-term value for stakeholders.
2. Setting targets and tracking progress
To set ESG targets, organisations should first conduct a comprehensive ESG assessment to identify areas for improvement. This involves a detailed analysis of the organisation's ESG performance across all relevant social factors and dimensions, including environmental impact, social responsibility, and governance practices.
Once the assessment is complete, the organisation can use the insights to set specific, measurable, and time-bound ESG targets. For example, for sustainability initiatives, an organisation may set a target to reduce its greenhouse gas emissions by 20% by 2025.
Organisations should establish a robust ESG reporting and monitoring system. Regular reporting on ESG metrics demonstrating progress and performance can help organisations build credibility and trust. It can also provide valuable insights into areas for improvement and help the organisation refine its ESG strategy over time.
3. Engaging with stakeholders
Considering stakeholder interests are fundamental to any ESG strategy. This involves identifying important stakeholders (e.g. employees, customers) and understanding what they value. Forward-looking companies actively engage with various stakeholders to unlock opportunities for all.
Technologies like SOL-X can improve engagement with workers by facilitating the evidence-gathering phase during an incident investigation. SOL-X can provide near real-time insights into the causes of incidents, enabling companies to take proactive measures to prevent similar incidents.
Harness the Benefits of EHS with Magellan X
By implementing ESG frameworks and EHS practices, you create value for yourself and your stakeholders in the short and long term.
Magellan X ecoMax and SOL-X can help businesses harness the benefits of both EHS and ESG standards. ecoMax helps companies meet their sustainability obligations through purpose-built technological solutions that monitor carbon emissions. SOL-X provides an industry solution that improves worker safety, helping to anticipate incidents and improves compliance workflows.
By using these solutions, businesses can ultimately build better ESG and EHS strategies. Ready to reap the benefits and propel your business? Reach out to our experts at Magellan X for more information today.