Summary
- ESG criteria evaluate a business across three dimensions — environmental impact, societal contribution, and governance practices — providing investors, consumers, and other stakeholders with a broader view of business risk and performance beyond traditional financial analysis.
- Strong ESG performance can improve a business’s reputation, attract investment, reduce financing costs, and positively influence long-term financial outcomes, with ESG now commonly assessed during mergers and acquisitions due diligence.
- Four practical ways to improve ESG performance include reducing your carbon footprint, improving diversity and inclusion, implementing robust governance policies, and using data analytics to track and substantiate ESG claims.
- This article is a plain-English guide to ESG performance criteria and improvement strategies for business owners operating in Australia, produced by LegalVision, a commercial law firm.
- LegalVision specialises in advising clients on corporate governance and business compliance.
Tips for Businesses
Identify the ESG issues most relevant to your business before attempting to improve across all criteria. Back any ESG claims with measurable data, as anecdotal evidence is insufficient for investors and due diligence processes. Regularly review and update governance policies and ensure staff at all levels are trained on their content and application.
Environmental, Social, and Governance (ESG) criteria give investors and stakeholders a broader view of a business by measuring its environmental impact, societal contributions, and quality of governance alongside traditional financial analysis. Strong ESG performance can attract investment, reduce financing costs, and support long-term business growth. 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.
- the environment criteria assess a business’ contribution to the environment – both positive and negative;
- the social criteria assess the business’ societal impacts; and
- 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.
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.
Whether it’s your first hire or your fiftieth, this guide will help you understand the moving parts behind building a high-performing team.
3. Have Clear Policies
Furthermore, from a governance perspective, it is important to have robust and transparent policies to address:
- workplace bullying;
- harassment; and
- whistleblowing, among others.
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.
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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.
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Frequently Asked Questions
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.
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.
Strong ESG performance attracts more investment, lowers financing costs, and rewards good corporate behaviour. Most Australian superannuation funds offer strategies that exclude low ESG-performing companies, and ESG performance is routinely assessed during mergers and acquisitions due diligence.
You should collect quantitative data to support your ESG claims, including carbon footprint measurements before and after implementing environmental policies, employee satisfaction survey results, and diversity metrics across stakeholders and senior leadership. Anecdotal or qualitative evidence alone is insufficient.
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