In the past, most businesses gave very little thought to the way they interacted with the rest of the world. However, with climate change, human rights issues, and worldwide needs topping the list of concerns that the current generations pay great attention to, that generation is creating matrices to analyze these businesses are being good corporate citizens. That analysis can determine whether money is spent with your business or somewhere else.
What is ESG and Why should you care?
That matrix known as ESG stands for Environmental, Social, Governance. Those are the three areas that have developed as the central factors in measuring the sustainability and ethical impact of an investment in a company or business. ESG is the term for the criteria used to determine whether an organization is engaged in socially responsible investing by spending its funds with another organization.
These are the factors that many young and socially responsible individuals care about when choosing companies to work for, shop with, or support with investments. No business exists in a vacuum – even without explicitly trying, you interact with ESG concerns. Choosing how you navigate these areas can greatly benefit your business in the long run.
Environmental Criteria
No matter what your business is, you’re using the environment in some way. Using resources to create new products, generating waste, using power; all of these things fall under environmental criteria. Businesses also need to consider their carbon emissions and their impact on climate change.
Social Criteria
Social criteria covers your relationship with your employees, customers, and communities where you do business. This criteria covers the Diversity, Equity, and Inclusion of your company, as well as human impacts locally and globally.
Governance Criteria
Every business has an internal structure, practices and procedures. This system of governance needs to comply with local and federal laws. Governance criteria must also consider potential corruption, political affiliations or donations, executive pay, board composition, and tax strategy. Working with a reputable legal team is a must for ensuring appropriate governance of your business.
But My Company Is Not Publicly Traded
ESG is a term that is often used in discussions about ethical investing in the stock market. Even if this does not impact your business, these three areas are still important for your business. Why? Because younger generations and socially responsible individuals deeply care about these causes. They want to know that the business they work for, or shop with isn’t creating an overall negative impact.
Besides the positive implications of having a healthy impact with ESG, it can also help you prevent future problems. When businesses operate in a risky manner, problems that can negatively impact your business are inevitable. Large businesses have a better chance of making it through a preventable problem, even if they feel the negative consequences (think of the BP Oil Spill). However, small businesses are less likely to make it through such problems. Considering each aspect: Environmental, Social, and Governance, can help you to prevent problems before they occur.
Is ESG the Same As CSR?
ESG most commonly refers to the specific criteria outlined above as it impacts the stock market. Many brokerage firms or mutual fund companies now offer Exchange-Traded Funds (ETFs) that follow ESG guidelines.
Corporate Social Responsibility (CSR) is a business model that helps companies show up for their values in terms of social causes, economic and environmental impact. You can read about CSR in detail in this blog post.
For businesses that are not publicly traded, ESG is a more structured way of considering CSR. Where CSR can be broad or narrow, or focus on one specific cause, ESG is more structured in calling businesses to consider all areas of Environmental, Social, and Governance related impacts.
Transcendent Law Group works with businesses to ensure they operate legally. We also offer Diversity, Equity & Inclusion Implementation & Training that speak directly to the organization’s culture. Contact us today to learn more!