ESG: understanding the importance for strategic business development
Companies have been working hard to improve their image to consumers all over the world. A significant part of that is developing clear statements, actions, and plans to minimize or eradicate harm to marginalized groups and the environment. All of these actions, policies, plans, and groups are part of the Environmental, Social, and Governance (ESG) framework.
ESG has gained notoriety since it first showed up in 2005 as a result of a United Nations initiative. Corporate ESG policies, practices, and commitments have captured the consumer and business to business world’s interest as buyers are no longer seeking to contract with the least expensive vendor, but instead are now seeking the vendor that does the least harm, has the clearest stance on social justice and anti-discrimination, and commits to continuing to improve efforts for the environment and society.
We are now facing clear privacy, pollution, and social justice challenges. Businesses that develop, implement, and communicate the strongest ESG practices and policies are also the ones with the best economic results, and capable of catching the eyes of investors, media, customers, and partners.
How can we define ESG in companies?
Each letter of the acronym represents a set of actions to be taken by companies. All three together should be seen as commitments systematically included in decision-making, linked to the company's business and its relationship with the world around it.
For every single letter, there are some fundamental themes. Let us explore each of them a little below.
For the 'E', companies take actions to lower their impact on nature, either by reducing water consumption in their facilities or by changing the formula of a product so that, when disposing of it, it does not pollute groundwater, for example. Among the macro issues that companies are concerned about we can find:
- Global warming and carbon emissions;
- Air and water pollution;
- Deforestation and logging;
- Renewable energy;
- Waste Management;
- Shortage of natural resources;
When we get to the Social acronym, we talk about all the people that the company relates to or impacts, whether with its products or where it is located. Among the main social issues addressed by companies today we have:
- Corporate diversity;
- Data and privacy;
- Safe and inclusive work environments;
- Respecting employees’ rights;
- Positive actions.
As for the letter G, we discuss a company's management practices, its policies that favor the previous two letters and thus enable it to achieve its best. Among the most important themes we will see:
- Ethics and conduct policies;
- Resource management;
- Circular economy;
- Relationship with public agencies;
- Operational efficiency;
- ESG Council;
- Whistleblowing hotline;
- Structuring of action and affinity groups.
Why should companies care about ESG?
First of all, companies should be concerned about ESG because we must have social and environmental responsibility today. Today's consumers have much more information about what they are going for and choose brands that have responsible practices.
Besides that, corporate investments are also guided by ESG. According to MSCI, "The practice of ESG investing began in the 1960s as socially responsible investing, with investors excluding stocks or entire industries from their portfolios based on business activities such as tobacco production or involvement in the South African apartheid regime. Today, ethical considerations and alignment with values remain common motivations of many ESG investors but the field has expanded to consider financial materiality as well.”.
In other words, even when it comes to looking for financing in order to expand, companies need to be concerned about their impact on the world. In the United States, ESG funds raised $51.1 billion from investors in 2020, which meant double compared to the previous year, according to Morningstar.
This goes far beyond having an "ESG department" in your company, once these practices should be a part of your business as a whole. Diversity and inclusion, which is one of the ESG points, for example, has the ability to increase creativity in your company, and that can positively impact financial results, in addition to making environments more pleasant, improving employee retention and a sense of purpose. It is not a one-person job, but something your entire company must do hand in hand on a daily basis.
According to McKinsey's research, ESG figures as a booster for companies' cash flow in 5 particular ways:
- Facilitating top-line growth;
- Reducing costs;
- Minimizing regulatory and legal interventions;
- Increasing employee productivity;
- Optimizing investment and capital expenditures
Each of the following topics may be applied differently depending on your industry but should be thought of when it comes to any ESG strategy.
As a whole, ESG is a framework of practices, and when brought into the light, places a company ahead of its competitors, with a clear vision on how to build the future. And that today, is an important indicator for investors who want to make sure they will get their share.
How to develop an ESG strategy?
Based on our experience, to develop ESG practices and strategies companies should:
- Understand the nature of your business and the impact it has on the world, whether negative, positive or neutral;
- Look inside: have a clear vision of the company's diversity scenario;
- Involve the entire executive bed in creating and executing ESG strategies;
- Have clear goals and objectives, meet the UN SDGs to help you in this mission;
- Define a multidisciplinary committee to start the work.
The first step you need to take is to understand the nature of your business in relation to its impact on the world. Nowadays, some companies have already woken up towards the importance of having a positive impact and they do it through their business models. These companies are called social business. Those companies can be banks to grant easy credit for the poor, ones involved in reforestation, or others working on the connection between fishermen and consumers in large urban centers, among other initiatives. Anyhow, these businesses impact people positively.
There are also cases of companies that have a negative impact on the world, such as mining industries or those who use a lot of drinking water to manufacture their products, for example.
For those cases, the best course of action is to think about how to turn that negative impact into neutral. An example of that would be investing in reforestation, not as the business core, but as a way to make up for carbon emissions from other activities. Another example of that is to invest in solutions that reduce water waste, as ABInBev does with their 100accelerator, with the goal to invest in solutions for the supply chain challenges in water stewardship, circular economy, sustainable agriculture, and climate action.
After identifying how your organization impacts society, we must involve the entire executive level, so that it is clear for them what ESG is, since adopting strategies in that area directly impacts the entire strategic planning of the company.
When looking for guidance on these actions, companies can sign the UN Global Compact, thus committing themselves to Sustainable Development Goals (SDGs). SDGs are placed in several areas, and companies can prioritize which objectives can be best met based on their performance. You can also make use of a free online tool that helps your company find its way through this process.
Lastly, when getting ready for the kick-off in ESG strategies, companies can set up a Committee on the topic, with people from different areas, whose mission will be to think of concrete actions, in addition to encouraging the entire company to reflect on and incorporate this strategy into their culture.
In CI&T's experience, looking inside was fundamental for the company's results in ESG. According to Ana Paula Fraga, CI&T's Diversity and Inclusion Manager, “Doing this [looking inside], companies already discover that they have initiatives and values linked to ESG, perhaps not robust practices or large programs, but values that are aligned with the contribution to society, the world and people”, she says.
Once the company notices the importance of the topic, it is only a matter of time before it shifts to other perceptions: “noticing the gap of women in the technology area, for example, led us to notice the gap of other groups, such as people black”. This critical look inward, far from being treated with guilt, is taken through the responsibility for the transformation.
says Ana Paula
“One of the first proposals after this connection was the creation of a CENSUS, to see the main challenges, gaps, even a diagnosis of our current situation.”, concludes Ana, giving a hint on how to get started on the subject.
After going through this great amount of information, you and your company are closer to building clear strategies for your future, while adding environmental and social responsibility to your next move. Every journey is packed with learning, and luckily we can always find others to exchange experiences with.
Learn more about our ESG practices.