The importance of ESG considerations for businesses
What is ESG responsibility?
Environmental, social, and governance (ESG) considerations are becoming an increasingly important part of corporate strategy for companies in the UK. ESG is a generic term used to refer to the factors that affect a company’s ability to create long-term value in the areas of ‘Environmental,’ ‘Social’ and ‘Governance.’ The demand for long-term ESG commitments is growing as UK and EU regulation strengthens, resulting in a rise in expectations from stakeholders and consumers.
Why should businesses have an ESG strategy?
There are several reasons why these initiatives are important for companies;
1. Investor scepticism: ESG is becoming an increasingly crucial factor in the investment decision-making process. Investors are becoming more aware of the impact of ESG factors on a company’s business value and are looking for companies that prioritise CSR considerations. According to a study by the Investment Association, 70% of investors believe that companies prioritising ESG considerations are more likely to generate long-term value.
- To increase brand value reputation: Companies with a long-term ESG strategy, especially with a BTC focus, can improve their reputation and brand value. Consumers are becoming more aware of the impact their purchase decision has on the environment and society and are increasingly seeking out companies with a green focus.
- Regulatory risks: Having sustainable initiatives can reduce regulatory risks to prepare companies for potential UK legislation as ESG considerations are increasingly becoming a regulatory requirement. Failure to comply with existing or emerging ESG regulations can result in fines, penalties, or legal action. Non-compliance can also harm relationships with regulatory authorities and limit business opportunities. Most recently, is the introduction of the EU Corporate Sustainability Reporting Directive (EU CSRD), a new policy that represents a significant development in ESG reporting.
- Financial risks: ESG factors can directly impact a company’s financial performance. Ignoring the considerations may lead to inefficiencies, increased operational costs, and reduced competitiveness. For example, failing to address environmental risks can result in higher resource consumption, increased waste generation, or exposure to environmental liabilities. Similarly, overlooking social risks, such as poor labour practices or inadequate employee safety measures, can lead to litigation.
- Employee satisfaction and retention challenges: Employees, particularly millennials and Generation Z, place importance on working for socially and environmentally responsible companies. Lack of a CSR strategy or inadequate attention to employee well-being, diversity, and inclusion can lead to employee dissatisfaction, higher turnover rates, and difficulties in attracting top talent.
- Increased business opportunities: Many businesses are adopting ESG practices to gain a competitive edge and access new markets. Failure to adapt to sustainability issues or align with trends can result in missed business opportunities, partnerships, or collaborations with companies and organisations that prioritise CSR values.
Is ESG for businesses of all sizes?
Having an ESG strategy is relevant and beneficial for businesses of all sizes, including large corporations and SMEs. While the focus and scope of an ESG strategy may vary depending on the size and resources of a company, the underlying principles of environmental, social, and governance responsibility should be applied to businesses of any scale.
For large corporations, an ESG strategy is often more comprehensive and may involve extensive reporting, dedicated corporate social responsibility teams, and integration into various aspects of the business. They may have the resources to implement sustainability initiatives, engage in community programs, and establish robust governance frameworks.
Small and medium-sized enterprises can also benefit from a corporate, social strategy, albeit in a tailored manner. SMEs may focus on specific areas of corporate social responsibility that align with their core values, operations, and available resources. For example, they can prioritise energy efficiency, waste reduction, responsible supply chain management, employee well-being, or community involvement.
Ultimately, an ESG strategy should be tailored to fit the specific needs, capabilities, and resources of businesses of all sizes. Regardless of their scale, organisations can make meaningful contributions to sustainable development and reap the associated benefits by embracing ESG principles.
How to get help with your ESG strategy
In summary, not reporting or addressing corporate social responsibility exposes companies to reputational damage, regulatory risks, financial risks, investor scepticism, employee dissatisfaction, retention challenges, and missed business opportunities. Embracing ESG reporting and practices can help companies mitigate these risks, improve their sustainability performance, and unlock potential benefits in the long run. In conclusion, if you are a UK subsidiary or a UK establishment and do not have ESG on your board agenda – it is by far time to add it. Please contact Goodwille’s governance team here, if you want further information on ESG and how your board should start preparing for it.
Goodwille’s client Position Green is the Nordic leader in sustainability software and consulting. They are on a mission to simplify ESG reporting to accelerate sustainability performance and improve competitiveness.