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Investors often use the environment, social and governance (or ESG) criteria to study a business, in addition to traditional financial analysis. By looking at a business’ contribution through the environment, social and governance models, investors and any other parties wanting to engage with the business get a more wholesome view of the business’ risks, strengths, weaknesses. This article discusses the ESG criteria and four things you can do to improve your business ESG performance.

ESG Performance Criteria

The ESG criteria looks at a business through three broad lenses: environment, social and governance.

  1. the environment criteria assess a business’ contribution to the environment – both positive and negative. 
  2. the social criteria assess the business’ societal impacts.
  3. the governance criteria evaluates the management and governance of the business. 

Likewise, ESG criteria have seen significant market adoption in the last few years. This is because it:

  • improves the business’ image;
  • attracts more investment, lower financing costs; and 
  • rewards good corporate behaviour. 

It is also seen as positively affecting the business’ longevity and future financial performance. 

Notably, consumers and investors place significant importance on responsible consumption and investment. This is clear from the number of mutual funds and exchange-traded funds that cater for social impact investors. Likewise, almost all superannuation funds in Australia offer an investment strategy that does not involve investing in low ESG performing companies. Further, ESG performance is also considered in most due diligence exercises during mergers and acquisitions

Ways to Improve Your Business’ ESG Performance

There are four key ways to improve your business’ ESG performance. However, note that it is rarely possible for a business to perform highly in every ESG criteria. So, your business should identify the ESG issues relevant to your business and try improving on those. 

1. Reduce Your Company’s Carbon Footprint

It is crucial to take proactive steps to reduce negative environmental impact. One way to do this is to reduce your business’ carbon footprint. Carbon footprint refers to the total amount of greenhouse gases a person or entity emits into the environment due to their actions. 

Indeed, you can reduce your carbon footprint through measures like:

  • reducing energy use;
  • utilising equipment and workspaces that are energy efficient; and 
  • implementing policies and strategies to reduce carbon footprint.  

2. Improve Diversity and Inclusion in the Business

Additionally, improving the diversity and inclusion of your employees and stakeholders is an excellent way to enhance your business’ ESG performance. In the ESG criteria, diversity and inclusion fall within the ‘social’ category. 

Although ‘diversity’ and ‘inclusion’ are linked, they are separate concepts. Diversity refers to the differences in the age, ethnic background, socio-economic background, abilities, ideas, and perspectives of people engaging with the business, whether employees, suppliers, contractors or other stakeholders. However, diversity of people and ideas does not mean much if those people and ideas are not involved in business decisions. This is where inclusion comes in. 

There are three critical ways to improve your business’ diversity and inclusion. You can:

  • enhance the diversity and inclusion of the suppliers and contractors by ensuring that you do business with various types of people in the market;
  • improve employee diversity and inclusion by hiring from diverse groups and creating a culture where diverse views and perspectives are welcomed; and
  • improve diversity and inclusion in the leadership by setting quotas and targets for senior positions. 

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3. Have Clear Policies 

Furthermore, from a governance perspective, it is important to have robust and transparent policies to address:

Such policies should provide a mechanism to escalate issues where appropriate. Likewise, ensure your business regularly reviews and updates these policies. Your business should also ensure the employees and senior management are aware and trained on those policies. 

4. Track Your ESG Performance 

This may sound obvious. However, it is essential that your business is tracking your ESG performance. It is not enough to have qualitative evidence of your positive contribution to the environment. Likewise, it is not enough to have anecdotal evidence of the steps you are taking to improve your business’ societal impact and governance record. 

Importantly, you need data to back up those claims. Accordingly, your business should deploy data analytics tools to collect data. Three types of data you could collect are:

  • your business’ carbon footprint before and after implementing environmental policies;
  • employee satisfaction in the business through surveys; and 
  • diversity in your business’ stakeholders, including senior leadership. 

Key Takeaways

ESG criteria assesses a business using non-financial data points like the business’ contributions to the environment, societal impacts, and governance. It provides a different view which helps investors and consumers see a more wholesome view of the business. Notably, it has gained significant traction in the past few years, and it may be beneficial for businesses to have high ESG performance. 

If you need help with your ESG performance, our experienced lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is the ESG business performance criteria?

The ESG criteria looks at a business through three broad lenses: environment, social and governance. The environment criteria assess a business’ contribution to the environment – both positive and negative. Next, the social criteria assess the business’ societal impacts. Finally, the governance criteria evaluates the management and governance of the business. However, note that it is rarely possible for a business to perform highly in every ESG criteria.

Why should my business aim to improve its ESG performance?

Investors often use the ESG criteria to study a business. ESG criteria concern a business’ contribution through the environmental, social and governance models. Therefore, investors and any other parties wanting to engage with the business get a more wholesome view of the business’ risks, strengths, weaknesses.  

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