Frequently Asked Questions on What ESG Means for Companies
Companies of all sizes are facing increased pressure to act on environmental, social, and governance (ESG) issues. Investors, regulators, communities, customers, employees, and other stakeholders are paying closer attention than ever before. That has many business leaders asking: What will we have to do about ESG? What are the key issues we’ll need to address? How will we benefit from an ESG program? And, most importantly, for some, how will we pay for it all? Below, we’ve answered several frequently asked questions to help companies like yours understand what ESG means for you in practice.
Q: Why is ESG important for companies?
A: ESG is important for a variety of reasons, from responding to investor pressure and managing financial risks, to reducing costs and waste and improving public relations. Every company contends with ESG issues and neglecting them can significantly increase the risk of experiencing negative incidents or controversies. We’ll look at some of these issues in more detail below.
Q: What are material ESG issues?
A: Material ESG issues (MEIs) are business issues related to environmental, social, and governance factors that may have a measurable impact on financial performance. Many of the risks associated with these issues can be managed with effective ESG practices.
Material ESG issues may fall under these topics:
- Corporate governance
- Access to basic services
- Bribery and corruption
- Business ethics
- Data privacy and security
- Emissions, effluents, and waste
- Carbon (from your own operations and from your products and services)
- Impact of products and services
- Human rights (in your own operations and in your supply chain)
- Human resources
- Land use and biodiversity (in your own operations and your supply chain)
- Occupational health and safety
- ESG integration in financials
- Product governance
- Resource use (in your own operations and in your supply chain)
For details on MEIs, visit the Sustainalytics Material ESG Issues Resource Center.
Q: Are there legal ESG requirements?
A: There may be legal and regulatory requirements in your jurisdiction related to ESG issues – for example, with respect to workers, human rights, products, corporate governance, data privacy and security, emissions, and much more. However, usually when we speak of ESG legal requirements and regulations, we are talking about measuring impacts and reporting. This area is changing rapidly. There are currently several voluntary standards for reporting to guide companies, and some countries are expected to adopt them as law over the coming years.
Q: What’s the role of ESG risk scores and ratings?
A: For companies, the main purpose of an ESG score or risk rating is to understand their ESG performance baseline. ESG ratings may be used in a number of ways, such as:
- ESG ratings provide transparency to investors regarding how exposed companies are to specific risks, and how well companies are managing them.
- Organizations increasingly rely on ESG scores or risk ratings to obtain specialized financing for sustainability programs and projects.
- Businesses use their ESG scores for benchmarking their ESG performance and demonstrating their commitments to stakeholders.
- Fund managers may rely on ratings to include companies in sustainable investment funds.
Q: What are the benefits of an ESG strategy?
A: By putting in place an ESG strategy, companies and their stakeholders can enjoy a range of valuable benefits, including improving investor and public relations, managing risk, reducing costs, and enhancing financial performance. The following questions will look at just a few of the broad benefits of incorporating ESG practice into your business.
Q: How can ESG improve investor relations?
A: Implementing an effective ESG program can improve investor relations in various ways. On a basic level, an ESG program requires good communication with investors to understand their needs and to share your progress. Moreover, investors, especially asset owners and asset management institutions, now expect to see corporate ESG policies and practices across the spectrum of environmental, social, and governance issues.
Q: How does ESG affect risk management?
A: ESG affects risk management because ESG practices are risk management practices. For example, companies that implement effective ESG programs may experience less exposure to supply chain disruptions and other ESG controversies. They may also find they are better able to respond when ESG incidents do occur.
In addition, stakeholders are increasingly relying on information about a company’s ESG efforts, including ESG ratings, to assess a firm’s risk exposures as well as its possible future financial performance. This applies to medium and smaller companies as well.
Q: How can an ESG program reduce costs?
A: Effective ESG programs can reduce business expenses in several ways. For example, sustainable practices could significantly reduce energy and water usage and limit the cost of packaging and the amount of waste your company produces. In the human resources department, companies with good ESG practices can reduce costs by limiting turnover-related expenses and attracting talent from a wider pool of potential employees.
Q: Can an ESG strategy improve financial performance?
A: There is a growing body of research showing that ESG practices can lead to better financial performance and increased shareholder value. By way of example, a Sustainalytics study showed that a portfolio of companies with the fewest ESG incidents outperformed global equity markets by 11%. Companies may also see financial growth from accessing new markets, e.g., Millennials or environmentally or socially conscious consumers.
Q: How can companies pay for their ESG programs?
A: The projects included in your ESG program may require financing, and firms can now access a growing assortment of financial instruments designed for ESG strategies. Companies can issue bonds or obtain loans whose proceeds are directed toward an element of an ESG program. Companies can also leverage their performance on ESG metrics to finance general corporate activities. For instance, sustainability-linked loans and bonds are linked to the company’s performance outcomes on relevant ESG targets rather than specific green or social initiatives.
Download our new ebook, Getting Started With ESG: What Every Company Needs to Know for details on how to start your ESG journey.