With so much uncertainty around the future of business at this moment in time, it can be difficult to know how to plan for the future. There is more to consider than ever before to futureproof yourself and to avoid forced major strategic changes.
Some governments have started to use different methods than normal for planning budgets and policy. New Zealand have moved away from using GDP alone in assessing the effectiveness of policy and started looking at wellbeing. This is measured through social, human, natural, and financial dimensions. It keeps a much wider focus on the performance of the country than just economic factors in isolation.
It’s a sign that more people are considering ESG investing and planning for the future. But what exactly is it?
What does ESG mean?
ESG stands for:
- Environmental
- Social
- Governance
ESG takes the three areas into consideration to guide the ethical governance and strategy creation for a business.
Environmental may cover climate change, water and energy efficiency, and how sustainable a business is.
Social may cover human rights, equal representation, or freedom of association.
Governance is more about how the business is run, business ethics, executive compensation, or compliance.
These are by no means exhaustive but it gives an insight into the sort of considerations that ESG raises.
What are the benefits?
One of the large factors is that you may be futureproofing your business from avoidable risk.
With net zero targets set to come into place plus changing public expectations of how fairly a business is run, businesses need to adapt. Decision making becomes more than just return on an investment but also what is right for the staff and wider society.
This becomes a more long-term financial strategy, but by setting a business up to be sustainable and to act with social responsibility in mind will provide benefits in the future. You may need to spend less energy to change to new legislation or customer expectations.
There is also the public image benefits; to be seen to be a transparent, ethically run business that is sustainable and efficient.
What can I apply to my business?
There is lots that you can do to help your company become more sustainable, ethical, and socially responsible. Some of them take a lot of work, and many are reasonably simple. Let’s break these down.
Environmental
Look for ways to become more self-reliant when it comes to energy.
You could consider sustainable energy sources such as solar or wind. You could look at installing heat pumps into your office to replace conventional heating methods, using sustainable and regenerative materials for building work, or setting high recycling targets.
These have a benefit of lowering your energy costs in the future, and will also help you produce less carbon as a business overall.
You can also look at your supply chain. Are you getting things shipped from all over the world? Could you source materials from closer to home? Are you using a high percentage of materials that are not recyclable or biodegradable? If so, consider what you can do to change this.
Location can also be a factor too. If you can embrace flexible working , there will be a bonus environmental impact of lower carbon emissions.
Societal
This is where you need to consider the impact of your business on people.
Does anyone, regardless of who they are or where they come from, have a chance of succeeding at your company? Is your business set to look after its staff with their wellbeing and health and safety in mind? Take some time to think about how you treat your staff.
Again, you can look at your supply chain. In 1991, Nike were embroiled in scandal after it was reported that children in Indonesia worked in poor conditions for low pay and long hours within a warehouse producing Nike goods. If you find yourself inadvertently ordering from an area that holds questionable human rights practices, what effect could this have on your business if it goes public?
Getting this right can help hire staff, retain staff, help towards avoiding any future union action, or even help avoid scandal or negative publicity.
Governance
This focuses on how a business is run from the very top. The criteria includes corporate governance, codes of business conduct, risk management, tax strategy, supply chain management, policy influence, and impact measurement.
Put simply; from the top down are you running your business in a manner that is diverse, ethical, fair, and considerate to the world around you? Are your internal controls fair and ethical?
Do you keep into mind employee rights as well as shareholder rights? Put thought into how you structure the management of your company.
Will this make me less profitable?
There are a lot of questions asked about the impact of ESG investing and governance on a companies profitability. This is a fair concern, however the good news is that figures show that this isn’t necessarily the case.
45% of consumers have stopped purchasing from certain companies over ethical or environmental concerns. There is a growing trend that people are looking to make more ethical lifestyle and consumer choices. When it comes to companies looking to futureproof their financial performance, it is wise to take this into account.
Investment may also be easier to come by than you first think. The risks and opportunities that potential investors weigh up when it comes to putting their money forward remain a consideration. However, principles and ethics are increasingly becoming part of the criteria for making investments.
48% of investors are reported to have an interest in ethical investments. As the global climate and financial issues become more prominent, a companies values are likely to also become more important.
By taking more environmental factors into account, companies will find themselves become more energy efficient which can lead to reduced energy bills. Add this to changing consumer habits and the potential for a profitable future is apparent.
Can I benefit from this?
There is no company too small to benefit from ESG investment.
Where larger companies may have more resources, smaller companies may have a closer connection with their customers to be able to share their story, their ethics and values, and what their principles and focus on society as a whole are and benefit from customer goodwill.
With net zero targets, an expected focus on diversity and inclusion, and ethical trading it is likely that legislation and compliance requirements will change in the future, and by getting ahead of the game you may save money and additional effort in the long term.
