In Short
- Enhanced Reputation: Implementing robust ESG practices elevates your company's standing among investors and consumers.
- Operational Efficiency: Adopting ESG strategies leads to cost savings through better resource management and waste reduction.
- Regulatory Compliance: Addressing ESG factors proactively ensures compliance with evolving legal standards, mitigating potential liabilities.
Tips for Businesses
To effectively integrate ESG practices, assess your company's current environmental, social, and governance performance. Develop a clear strategy with measurable goals, and regularly report on progress to maintain transparency and accountability.
Investors and consumers are increasingly employing environmental, social and governance, otherwise known as the ESG criteria, to evaluate the ethical standing of businesses. This standard goes past your typical financial analysis models to assess businesses with a focus on the environment, contributions to social well-being and their internal governance mechanisms. This article explores the growing significance of ESG criteria, providing five reasons why businesses in New Zealand should actively strive for high ESG performance.
Why is ESG Relevant?
ESG is an acronym for environmental, social, and governance values. It serves as a metric to gauge a company's alignment with the ESG principles, using various criteria to evaluate its performance across these three areas, which are as follows:
- environmental: evaluates your company's energy consumption, waste discharge, resource usage, and associated environmental impacts. These contributions to the environment can be both positive and negative;
- social: addresses your company's relationships and the reputation it builds with individuals and institutions; and
- governance: the governance of internal company practices, controls and procedures implemented to ensure legal compliance, meet the requirements of external stakeholders, and govern its operations.
The above elements are intertwined and can overlap, such as when human rights laws need to be followed with ties to both social and governmental systems.
A few examples of ESG criteria involve looking into the following:
| Environmental | + carbon footprint and decarbonisation + energy sources + water and land use + waste and pollution management + sustainability and climate change |
| Social | + workforce labour practices + human rights + community engagement + diversity and inclusion + ethical supply chain operations |
| Governance | + management practices + leadership diversity + company behaviour, such as the treatment of bullying and harassment claims + company decisions + internal governance and measures + engagement with public officials |
These areas are typically excluded from traditional financial reports. However, by prioritising them, your business will likely gain a more comprehensive understanding of its longevity and future financial performance.
The Increasing Importance of ESG Criteria
In New Zealand, the increase of socially conscious investors underscores the growing significance of ESG criteria in business strategies. Investors now seek financial returns and positive societal impact, while consumers increasingly favour socially responsible businesses. Recognising the benefits, companies integrate ESG considerations into core strategies and pricing, aligning with a socially and environmentally conscious model.
Notably, corporate social responsibility (CSR) precedes ESG, emphasising positive steps to address economic, social, and environmental impacts, focusing on external initiatives. However, the CSR model lacks quantifiability. In contrast, ESG assesses the business' core social responsibility and offers quantifiable metrics for meaningful business comparisons.
Five Reasons to Prioritise High ESG Performance
| 1. Enhances company valuation and increases investing appeal | As investors seek impactful, long-term
opportunities, companies prioritising ESG factors and acting on
them are gaining appeal. Potential shareholders, drawn to ethical
and socially responsible businesses, are increasingly attracted to
such firms. Taking proactive and transparent measures on ESG issues further improves company valuations. |
| 2. Better regulatory adherence and strategic flexibility | Adhering to ESG disclosures for better alignment with global
regulatory trends and policies mitigates risks of legal disputes,
fines and reputational harm, which are outcomes of prioritising
high ESG performance. This is crucial for maintaining ethical
business practices and meeting societal expectations. Therefore, prioritising high ESG performance grants companies greater strategic flexibility as they can better equip themselves for evolving market conditions and regulatory landscapes through ESG adherence. |
| 3. Satisfy shareholders and attract customers | Implementing sustainable practices satisfies socially
responsible shareholders and maintains long-lasting customer
loyalty and appeal. The power of purpose in ESG initiatives
contributes to shareholder satisfaction and can offer a competitive
advantage in the market. For example, implementing sustainable business practices to differentiate may attract customers who prioritise ethical considerations. |
| 4. Helps guide and underpin effective risk management | Integrating ESG factors into corporate decisions is crucial for
risk management and mitigation to address potential risks before
they escalate. Furthermore, investing in ESG capabilities aids data collection, preventing various risks, and ESG reporting tools enhance overall practice efficiency. |
| 5. Corporate citizenship | Corporate citizenship refers to your company's
responsibility to contribute positively to society and the
environment beyond its primary economic objectives. Engaging in corporate citizenship by acting on your ESG initiatives further enhances your company's reputation. This further fosters better social credibility and enables your business to be a leading positive force in the industry. |
Key Takeaways
Companies prioritising ESG in their decision-making will be strategically positioned to address growing risks and capitalise on opportunities across the entire spectrum of ESG concerns. ESG criteria hold significant importance for socially responsible investors and consumers. They complement financial analysis by realistically depicting a business to its internal and external stakeholders, consumers, and investors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.