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Environmental, social, and governance, or ESG, is becoming a top priority for investors, stakeholders and consumers. ESG is normally a criteria for risk evaluation based on environmental, social and governance practices. Investors look at ESG performance to evaluate their potential investment or stake in a company, while stakeholders and consumers determine their brand loyalty by looking at a company’s ESG commitments.
Understanding the “E” in ESG
The “E” in ESG can be defined as the measurement of the environmental impact and sustainability of a particular company. It takes into account a company’s utilization of natural resources and the impact their business has on the environment, both in their direct operations and across their supply chains.
This may include:
- carbon imprint
- pollution
- material disposal
- resource management
- sustainability practices
- future environmental goals
The shift in mindset
In the past, environmental concerns used to interest solely activists or were widely visible in the wake of a major disaster. Today, customers are putting their money towards sustainable products and in some cases are willing to pay more for them. Areas like sustainability, environmental stewardship and climate change are mainstream focal points for most people. Investor focus continues to shift also to socially responsible companies as they’re subject to less scrutiny and risks.
5 reasons why the E matters
- Good for business: Having a strong environmental proposition helps companies reach new clientele and investors. A McKinsey report found that more than 70 percent of consumers surveyed on purchases in multiple industries said they would pay an additional 5 percent for a green product if it met the same performance standards as a non-green alternative. Additionally, executing on environmental practices well can help stall a company’s rising operating expenses like water, carbon and raw materials.
- Limits regulatory interventions: Today, preventing environmental harm is a key political agenda as more and more lawmakers are pushing for environmental protections. Companies that carefully manage their sustainability can ease regulatory pressure on companies and reduce their risk of adverse government action. Businesses that prepare for environmental issues and mitigate risk will have an advantage as rules and regulations change.
- Improves employee engagement: Employees, especially younger generations, tend to gravitate to companies with purposeful missions. A company with a record of positive environmental impact can find it easier to attract and retain quality employees, motivate them by instilling a sense of purpose and increase productivity. The workforce is in tune with environmental issues and concerned about their own negative environmental impact. Adopting sustainability as a core business goal and integrating it into the company culture aligns the corporation’s values with many of its employees.
- Increasing investor interest: Sustainability is indeed profitable. Companies with ambitious sustainability goals benefit from investor interest. In 2020, sustainable investing hit a record high, with one-quarter of all newly invested money being categorized as such.
- Positive brand reputation: A company’s reputation can be irreparably damaged by a major environmental disaster such as an oil spill, but they can also be tarnished for less dramatic reasons. Consumers now have a heightened awareness of sustainability and issues like climate change. Environmental issues that were overlooked are now publicized quickly and easily across the globe. Companies that are seen as wasteful or damaging to the environment can be penalized by the public through boycotts or negative social media activity.
The “E” in ESG can be easily controlled through proper supply chain management. At Avetta, our clients are saving money and time reaching their sustainability goals with our services.
