The environmental, social, and governance abbreviation “ESG” has seen progressively increasing fortunes since its inception in 2005. For instance, since 2019, searches for “ESG” (environmental, social, and governance) have increased fivefold on the internet, while searches for “CSR” (corporate social responsibility), a previous area of concentration more reflective of corporate engagement than adjustments to a core business model, have decreased. Organizations have been devoting more funds to enhancing ESG across industries, regions, and corporate sizes. ESG reports are now published by more than 90% of S&P 500 businesses and roughly 70% of Russell 1000 companies. ESG reporting is either required or being actively considered.
Even if the rate of new investments has recently been declining, the growing importance of ESG has been clearly shown in investments. For instance, inflows into sustainable funds increased from $5 billion in 2018 to more than $50 billion in 2020—and then to almost $70 billion in 2021. These funds also had net inflows of $87 billion and $33 billion in the first and second quarters of 2022, respectively. Global sustainable assets are estimated to be worth $2.5 trillion by the middle of 2022. This reflects a 13.3 percent decline from the end of Q1 2022, which is smaller than the market’s 14.6 percent decline during the same time period.
Companies should anticipate and prepare for obligatory reporting on issues given the interconnection of SA companies to global markets through commodities and capital markets as well as the convergence in standards. Despite the possibility of skepticism, it is crucial to take prompt action based on knowledge of the biggest risks and opportunities. This should result in better brand positioning with customers, increased talent acquisition and retention, decreased risk, and a lower cost of capital. If companies continue to concentrate on the fundamentals, they should be able to reap big rewards early.
Responses to climate change and the environmental aspect of ESG have played a significant role in the expansion of the ESG industry. However, other ESG components, particularly the social dimension, have also been rising to the fore. According to one research, the number of shareholder proposals having a social focus increased by 37% in the 2021 proxy season over the prior year.
Critics have asserted that the significance of ESG has peaked in the wake of the war in Ukraine and the resulting human tragedy, as well as the cumulative geopolitical, economic, and societal implications. They argue that the focus will increasingly turn to the more fundamental components of a Maslow-type hierarchy of needs for the public and private sectors and that today’s obsession with ESG may be seen as just a passing fad and follow the path of other acronyms that have been used in the past. Others have countered that ESG is a strange and unstable confluence of factors and that the only important factor is environmental sustainability. Parallel to this, there have been an increasing number of threats to the ethics of ESG investing.
The main justification for corporations pursuing ESG initiatives is brand identity and reputation.
A thoughtful approach to ESG is now more crucial than ever for enterprises of all sizes. For a wide range of interested stakeholders, including shareholders, suppliers, regulators, customers, and employees, ESG continues to be at the top of the agenda.
The focus on ESG is still strong and will only get stronger in the wake of the worldwide pandemic, ongoing social justice challenges, geopolitical risk, increased regulatory scrutiny, and other factors. Regarding many of these topics and focal areas where advancement has been made, is possible, and where work still needs to be done, many significant businesses continue to exercise their thought leadership around many of these issues and focal areas where progress has been made, can be made, and where there is still work to be done.
A 2021 OCEG survey concluded, “As ESG moves away from a box-checking exercise towards a legal requirement, organizations need to be certain they have the structures and processes in place to allow them not only to comply but to thrive.”
Therefore, how should SA businesses react?
- Recognize what sustainability means in respect to the mission of your business. The secret is to properly include sustainability into your strategy and to grasp how it links to the goal of your business.
- Adopt a multidisciplinary approach to decision-making while realizing that there are frequently many trade-offs to be made when it comes to sustainability.
- Clearly define roles and duties and acknowledge that everyone must participate. To handle ESG risks and opportunities, for instance, finance must ensure that the appropriate capital is allocated, and procurement must be included to support sustainable supplier chains.
- Spend money on data management and controls. As financial and sustainability reporting become more intertwined, the quality and integrity of sustainability data will come under more scrutiny. Companies must guarantee “investor grade” ESG data.
- To remain on top of developing issues, be connected to your stakeholders and context. Be very explicit about how you define what is important to you, and don’t forget to include the opinions of your staff and consumers in this process.
