ESG for Businesss

 

ESG is an acronym that stands for environmental, social and governance aspects of a company's operations. In recent years, ESG factors have become the main criterion for investors and consumers to evaluate companies. In this article, we will look at how the ESG agenda has become the main focus of business and what prospects and challenges companies are facing.

 

ESG perspectives for business

ESG initiatives can be good for business for many reasons. First of all, companies that pay attention to environmental, social and governance factors are able to attract more investment and consumers who are increasingly sensitive to sustainability issues. Most major investors and funds require companies to report on their ESG performance. This approach dates back to the 1960s, when Western investors began to pay attention not only to the profitability of companies, but also to environmental and social responsibility (a number of investors boycotted so-called "sin stocks" - companies related to the production of alcohol, tobacco and gambling). The approach called socially responsible investing has become widespread, which assumes that companies whose activities do not harm the environment and solve the problems of society should be financed[1]

The concept of sustainable development is firmly established on the international and national agenda, and has become an important aspect of the activities of multinational companies, and indeed of all major businesses. Sustainable Development Goals (SDGs) guide the development and adjustment of strategies and plans in both the public and private sectors.

In addition, ESG initiatives can help companies improve their image and reputation. Today, consumers are increasingly focused on brands that care about social and environmental issues and may evaluate companies based on this criterion. Companies that pay attention to ESG can gain an advantage over competitors who do not pay enough attention to it. Examples include global market leaders such as:

Unilever is a leader in FMCG that has integrated ESG factors into its business strategy and recognized that it helps to reduce risk and improve product quality. Unilever has released its Sustainable Living Plan, which includes targets to reduce carbon emissions, reduce waste and increase the amount of products created using renewable energy. The company is also actively working to eliminate discrimination and human rights violations at all stages of its operations. The company's efforts in this area are reflected in its position in international rankings. Unilever was recognized as the best employer in 2021 in the Consumer Goods category by Universum Global. And it was also recognized as the best employer in 2019 in Europe by Forbes magazine.

Tesla is a leading electric vehicle manufacturer that has made sustainable energy production and use a central element of its business strategy. The company is actively investing in renewable energy sources, such as solar panels and energy storage, and developing new technologies to improve the energy efficiency of its vehicles. Tesla is also working to improve working conditions for its employees and respect human rights in its supply chains. The electric car maker's stock has risen 5837% in a decade - while Tesla's papers started trading at $17 apiece on June 29, 2010, ten years later one share of the company is worth $1009.35[2].

Patagonia is an eco-friendly outdoor apparel and equipment company that recognizes the importance of social and environmental responsibility. The company actively works to reduce carbon emissions, eliminate the use of hazardous chemicals in production, and protect workers' rights and human rights in its supply chains. Patagonia also funds conservation projects and promotes sustainable lifestyles among its customers.

Failure to adhere to ESG principles can lead to serious business failures, including loss of reputation, reduced profits and loss of customers. Let's look at some examples of business failures due to non-compliance with ESG principles.

1.       In 2010, BP faced the largest oil disaster in history in the Gulf of Mexico[3]. The disaster resulted in the leakage of millions of barrels of oil and serious consequences for the environment. The company not only lost many billions of dollars, but also suffered serious reputational damage because its operations were incompatible with the principles of environmental responsibility.

2.       In 2015, Volkswagen was accused of installing special software on diesel cars that allowed them to cheat emissions tests. This resulted in serious reputational damage and major financial losses for the company.

3.       In 2016, Wells Fargo was accused of creating millions of fake accounts without customer consent. This resulted in serious reputational damage and reduced customer confidence in the bank.

 

 

ESG challenges for companies

While there are many benefits associated with ESG initiatives, for businesses they also present a number of challenges and issues to consider.

One of the main challenges is that ESG initiatives require large investments in the areas of environment, social responsibility and governance. This can be a serious financial burden for many companies, especially SMEs. Some companies may feel that investing in ESG initiatives is not justified and would rather focus their efforts on increasing revenues and profits.

In addition, ESG initiatives may result in the need to change business models and processes, which can be a complex and costly process. Some companies may find it difficult to implement new practices, procedures and systems necessary to comply with ESG standards.

Another challenge associated with ESG initiatives is that there is a risk of "greenwashing", where companies try to present themselves as more environmentally or socially responsible than they actually are. The term applies to cases where companies advertise their environmental benefits and achievements instead of actually investing in green technologies. A prime example is putting brightly colored labels with green trees and leaves on containers of agricultural chemicals, which are supposed to evoke a sense of confidence in the safety and environmental friendliness of the product inside.

Assessing the ESG situation in companies can be done in a variety of ways. One of the most common methods is the use of rating agencies that develop ESG ratings for companies. Rating agencies use various criteria to evaluate companies such as risk management, environmental and social issues, corporate governance, etc. Some well-known ESG rating agencies include MSCI, Sustainalytics, ISS ESG, FTSE Russell and Moody's ESG Solutions.

Companies can also use their own tools and methods to assess their performance in terms of ESG factors. They can conduct audits and assessments of their environmental and social performance and risk management. In addition, they can review reports from ESG rating agencies to determine which areas are most important to assess and improve their performance.

ESG ratings are developed based on various criteria, and the formulas for their calculation may vary from rating agency to rating agency. Typically, however, ESG ratings are based on a weighted set of factors, each of which is evaluated based on its importance and impact on the company. For example, one ESG rating agency may include factors such as air pollution, level of supply chain disruption and level of diversity in corporate governance, while another may include other factors such as carbon management performance, net profit and business ethics.

A company's final ESG rating is usually presented as a numerical value or letter grade that indicates its overall level of performance in terms of ESG factors. A high ESG rating indicates that the company is considered to be more sustainable and responsible, while a low rating may mean that the company is facing ESG challenges that could negatively impact its reputation and financial performance in the future.

To improve their rating - companies can undertake a number of actions. For example, they can improve their environmental performance, implement better risk management measures, improve working conditions and workplace safety, and improve corporate governance.

One of the most common methods to improve the rating is to integrate ESG factors into a company's business strategy. Companies can integrate ESG factors into their goals and mission and use them to make investment and business development decisions. In addition, companies can create separate divisions or committees to manage ESG factors and coordinate their efforts to improve their performance in this area.

Conclusion

ESG initiatives are becoming increasingly important to businesses in our modern economy. They can lead to improved corporate reputations, reduced costs and increased revenues. However, they also present a number of challenges and issues that need to be considered when implementing them. Companies must be willing to invest in ESG initiatives, change their business models and processes, and be honest and transparent about their environmental, social responsibility and governance achievements. Only then can ESG initiatives maximize the benefits to the company and its stakeholders. Today's CEOs should realize that ESG initiatives are not just a trend, but an integral part of modern business.