Beyond various compliance schemes such as ESOS and SECR, businesses are increasingly being asked about their ESG strategy. But what is ESG and how will it play a role in your business? In this article, we’ll take a deep dive into everything you need to know about ESG for business.
What is ESG?
ESG stands for Environmental, Social, and Governance. It is a framework used to evaluate the sustainability and ethical impact of a business or company. ESG criteria are increasingly used by investors and stakeholders to assess risk and growth opportunities. This approach goes beyond traditional financial metrics to consider a company’s overall societal impact and long-term sustainability.
What are the three dimensions of ESG?
Environmental
The environmental dimension of ESG examines how business activities are impacting the planet. This includes how a company manages their energy use, greenhouse gas emissions, resource depletion, waste management, and biodiversity. Companies demonstrating strong environmental commitment will have thorough data collection and a strategic approach to minimising their impact on the planet.
Social
The social aspect of ESG assesses how a company manages relationships with employees, suppliers, customers, and the communities in which it operates. Key considerations include labour practices, employee engagement, diversity and inclusion, human rights, and community impact. Creating social value means making a conscious effort to benefit the lives of people within and outside of your organisation, as well as up and down your supply chain.
Governance
Governance involves the internal system of practices, controls, and procedures a company adopts to govern itself and make effective decisions. This dimension focuses on board diversity, executive compensation, transparency, shareholder rights, and ethical business practices. Strong governance ensures accountability, fosters trust, and aligns management and shareholder interests.
Why is ESG important?
ESG is a vital framework for understanding a company’s broader impact on society and the environment. It is increasingly central to investment decisions, corporate strategy, and regulatory compliance, shaping the future of sustainable business practices. ESG is crucial for several reasons:
- Risk management: ESG factors help identify risks that could impact a company’s financial performance and reputation.
- Value creation: Companies with strong ESG practices often enjoy better operational performance, lower costs, and improved profitability.
- Investor demand: There is growing investor interest in sustainable and ethical investments, driven by awareness of climate change and social issues.
- Regulatory compliance: Adhering to ESG standards helps companies meet increasing regulatory requirements and avoid potential penalties. Smaller companies are increasingly being asked to disclose ESG activity as a part of supply chains.
- Reputation and trust: Companies that prioritise ESG are likely to gain the trust of stakeholders, including customers, employees, and investors.
Who do ESG regulations apply to?
ESG regulations are being introduced globally, with varying requirements across countries. Non-compliance can result in severe consequences, including fines, loss of stakeholder trust, and reputational damage.
In the UK, there is no single ESG law, but ESG requirements are embedded in broader policies for large and publicly listed companies. Key UK requirements include:
- Companies Act: Large companies that have more than 500 employees or exceed £500 million in annual turnover and are listed are required to disclose sustainability elements, such as their energy usage and carbon emissions.
- UK Sustainability Reporting Standards: In June 2023, the International Sustainability Standards Board (ISSB) published its inaugural Sustainability Disclosure Standards. The UK government aims to make UK-endorsed ISSB standards available in Q1 2025.
Following the publication of the UK Sustainability Reporting Standards, the UK Government is expected to announce reporting requirements for listed companies. This will affect large businesses, and the businesses that are in their supply chains.
In the EU, all large and listed companies (except listed micro-enterprises) must disclose risks, opportunities, and impacts related to social and environmental issues. The Corporate Sustainability Reporting Directive (CSRD) extends this requirement to a broader set of large companies, listed SMEs, and some non-EU companies generating over EUR 150 million in the EU market
How are ESG metrics disclosed?
Organisations disclose ESG metrics to provide stakeholders with insights into their sustainability performance. ESG reports are often published alongside, or included in, annual reports.
Companies can use established frameworks like the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB) to guide their reporting. These frameworks help companies determine which ESG issues to prioritise and how to structure their disclosures effectively.
If you don’t already, ESG is a key framework your business should be utilising to uphold the sustainable and ethical impacts of your business.