Environmental, Social and Governance

30 May 2023

Global challenges are changing the workplace, presenting employers with new risks and obstacles. Employers must respond to complex problems, such as climate risk, demographic shifts and privacy and data concerns. Ignoring these problems can expose organisations to increased pressure and scrutiny from investors, customers and employees. Many employers are feeling pressure to shift their priorities and workplace cultures to focus on these larger issues, especially as investors, customers and employees are choosing organisations that align with their values. As a result, an organisation’s culture is more important than ever.

A solution employers are using to respond to challenges is prioritising environmental, social and governance (ESG) initiatives. These can help employers create a cleaner, safer and more sustainable world and improve their ability to attract and retain top talent and investment. Employers can gain a competitive advantage, improve their brand and increase their bottom line by educating themselves and acting now to develop ESG strategies and practices.

This article explains ESG and discusses what employers should know about these initiatives.

What Is ESG?

ESG refers to an organisation’s environmental, social and governance practices. It’s a framework used by investors, customers and employees to understand organisations on a broader scale and evaluate their long-term health and resiliency. Some organisations utilise ESG measures to increase top-line growth, reduce costs and improve their image with potential investors, customers and employees.

ESG is an umbrella term for a value-based approach to business. Words like “impact” and “sustainable”
are often used interchangeably with ESG. What organisations mean by ESG measures can vary greatly, but the three basic components include:

Environmental—Environmental ESG explores an organisation’s impact on the environment. It
encompasses issues related to the environment, including carbon emissions, pollutants, deforestation,
run-off, disposal procedures, resource efficiency and biodiversity. Environmental ESG often addresses
an organisation’s history with regulatory bodies, including any legal action and fines related to their
environmental conduct.

Social—Social ESG analyses the organisation’s relationship with whom it interacts. For example, it
evaluates how an organisation manages relationships with employees, customers, suppliers, partners
and communities. Social ESG gauges how an organisation treats its employees, including examining
employee pay, benefits, work-life balance and diversity. It also covers an organisation’s values, supply
chains, customer service and human rights.

Governance—Governance ESG looks at how leadership runs an organisation. It examines executive governance, such as executive compensation and bonuses, stakeholder incentives, metrics, security, regulatory compliance, fraud, corruption, conflicts of interest and transparency. These factors allow investors to perform due diligence on an organisation.

ESG initiatives allow organisations to quantify their impact on the wider world and how resilient they
may be to future challenges.

Currently, ESG reporting is largely voluntary in most cases. Although some registered companies and LLPs of a specific size are required to report on certain ESG actions, most organisations are not required to meet specific ESG standards or report on their ESG initiatives.

Moreover, while some large UK companies have ESG obligations (the reporting requirements specifically relate to environmental impacts, despite being billed as ESG laws), there is no single standard for all ESG metrics. This can make establishing such goals and frameworks difficult. Yet, despite these challenges, self-reporting on ESG efforts could prove worthwhile. In fact, some investors use ESG reporting to increase profits by investing in well-managed, socially responsible organisations; such reporting can help investors identify an organisation’s strategic risks and opportunities and then predict how it would perform if managed differently. ESG reporting can also help improve an organisation’s talent and retention efforts, brand value, financial performance and risk management. Organisations can rely on
experienced consultants or recognised ESGreporting frameworks to guide their overall ESG strategy and establish ESG metrics and goals.

The Difference Between ESG and CSR

Both ESG and corporate social responsibility (CSR) address the social responsibilities of organisations and
guide organisational practices, values and goals. These terms are related and overlap at times, but they are distinctly different. CSR demonstrates an organisation’s commitment to being sustainable and responsible, while ESG builds on that foundation with measurable goals.

CSR generally refers to an organisation’s impact and how it approaches accountability for its actions. CSR
includes internal and external business activities, but notably, it can have a substantial impact on attracting and retaining employees. CSR topics fall under the following categories:

Environmental—Environmental CSR refers to how an organisation’s actions impact the environment.
Environmental and sustainability efforts are often at the core of CSR strategy, as organisations strive to
make decisions that balance both short- and long-term goals.

Social—Social CSR can include working conditions, inclusion efforts and labour practices.

Economic—Economic CSR refers to efforts that simultaneously financially impact an organisation and
society, such as job creation and profit-sharing with stakeholders.

CSR addresses broad social, environmental and economic concerns in an organisation’s policies, practices
and decision-making. It can serve as the backbone of an organisation’s culture and guide insights into its
values. But, CSR is hard to measure in a meaningful way and is generally self-regulated.

ESG, however, uses environmental, social andgovernance factors to evaluate an organisation’s
sustainability practices and organisational responsibility goals. While CSR aims to make a business accountable, ESG allows organisations to measure their efforts. ESG is quantitative and provides measurable outcomes that help investors improve decision-making about an organisation’s risk and ethics. It can also help consumers and employees decide which organisations to support by knowing if an organisation’s practices and actions align with its values. Both CSR and ESG are important and related to an organisation’s social responsibilities. CSR holds organisations accountable to their social commitments qualitatively, and ESG helps measure those social efforts.

What Employers Should Know

How an organisation impacts its surroundings is a major factor affecting its bottom line. CSR initiatives impact an organisation’s internal processes and culture, but ESG measures can reveal whether an organisation is set up for long-term success. An effective ESG strategy can improve an organisation’s cost-saving efforts by reducing waste and optimising resource allocation. It can aid attraction and retention efforts, increasing an organisation’s overall productivity and decreasing costs related to employee turnover and training. By incorporating ESG factors into core business strategies, organisations can strengthen their culture and positively impact their talent recruitment and retention, customer attraction, cost savings and the reduction of long-term risk.

ESG issues are broad and require a systems-based approach. As a result, reporting and transparency can
be difficult, and some organisations fall short. Many organisations struggle to implement effective ESG
strategies due to insufficient resources, lack of accountability and oversight, and ambiguous organisational structures. Despite these potential difficulties, ESG programmes are more important than ever, and most employers cannot afford to neglect them.

Establishing ESG strategies and practices can be overwhelming, so organisations may want to consider
starting now; a proactive approach allows organisations to build lasting and pragmatic practices. Employers can begin by casting a wide net and considering various ESG factors. Organisations can use their CSR initiatives as the foundation to build their ESG strategies. Without a systematic approach, efforts may fall short or lack sustained focus. Employers can consider utilising stakeholders to identify and evaluate ESG risks and opportunities for their organisations. If employers are unable to keep pace, they may find themselves disadvantaged to socially conscious investors, customers and employees, outmaneuvered by competitors and subject to regulatory scrutiny.

Why This Matters

ESG initiatives benefit not only an organisation’s brand but also its bottom line; links between corporate
sustainability and financial performance have been established in studies. For instance, 88% of companies
that focused on sustainability saw improved operational performance, according to research by Oxford
University and Arabesque. Moreover, such inflated productivity led to higher corporate cash flows.

Additionally, these initiatives can enhance employee attraction and retention, which is identified as one of
the top workplace challenges for employers. For example, 52% of workers would stay longer with a company that made ESG commitments, according to a study by health care specialists BUPA.

Employers with effective ESG practices may also benefit from increased employee morale and involvement; employees can be more driven when working for an organisation that shares their values. Thus, ESG practices can result in an increase in employee loyalty and improvement in an organisation’s overall talent retention rate. In addition, more customers are evaluating an organisation’s ESG practices when making purchasing decisions, so organisations can gain a competitive advantage with effective ESG initiatives. ESG practices and strategies are also now commonly included in the criteria for receiving investment funds.

Summary

Historically, an organisation’s performance mattered most. Now, investors, customers and employees are
evaluating sustainability when examining an organisation. This provides organisations with an opportunity to stand out among their competitors by prioritising and implementing ESG practices. Doing so can increase an organisation’s overall bottom line; improve retention rates, employee morale and productivity; decrease recruiting and training costs; and expand its customer base. In turn, prioritising ESG factors can help employers be a positive force in their communities and the wider world.

Contact us today for more workplace resources.