Looking back at 2020, it was a year of significant change and disruption, thanks to a once-in-a-lifetime pandemic and significant social and environmental change, which helped to bring the impact of Environmental, Social and Governance (ESG) to businesses large and small.
Getting your business’s ESG proposition and message right is critical as it has become an integral part of how business is increasingly being done. ESG impacts business performance and research has shown that companies that focus on ESG concerns experience higher equity returns and better performance.
Investors have learned that ESG helps them understand a company better through insights into how a company behaves, how it acts, reacts and adapts based on various ESG factors, which can result in better risk management and investment decisions.
ESG investing involves looking at nonfinancial information associated with an investment to identify potential risks and rewards associated with how the company deals with environmental, social and governance issues.
COVID-19 put a brighter spotlight on ESG practices, showing how the pandemic impacted businesses, where they responded well, where they fell short and what opportunities they have to enhance their ESG practices in the future.
ESG is here to stay, yet some companies can have a hard time figuring out what ESG means. They want a simple checklist to follow, but it’s more than that. It’s about determining what issues are material for your own company and industry. As interest in ESG grows, myths and misperceptions remain and must also be debunked to help business fully embrace ESG’s full impact:
Myth #1: ESG strategy can easily be replicated
Actually, an ESG strategy isn’t something that can be replicated from peers. ESG can look very different for each business, and your ESG program will be unique to your business’s own facts and circumstances. While there are general guidelines across specific industries, it is up to each individual organization to run its business in a different way that brings value to stakeholders, customers, employees and investors.
Myth #2: During a crisis, ESG should give way to profitability
The perception is that when the financial chips are down, companies and shareholders care only about profitability. ESG actually becomes increasingly important in any type of downturn. Crises like the global pandemic often highlight where nonfinancial risks exist within companies and how damaging they can be to the bottom line. For instance, public companies may find that their human-capital decisions in response to COVID-19 have an impact on the way shareholders vote and engage.
Myth #3: ESG is more about the ‘E’
Many companies have grown comfortable with governance – the “G.” Increasingly, the environmental “E” in ESG is getting more media and shareholder attention – particularly in the face of growing concern about climate change. As companies dealt with COVID-19, the social considerations of ESG – the “S” – also came to the fore.
How companies deal with employees, engage with customers and manage supply chains are all areas that fall under ESG. For example, the COVID-19 outbreak underscored the value of having a robust remote-working infrastructure, including strong networks and cybersecurity practices, in place when the crisis hit. For companies that had to develop those capabilities on the fly, this lack of ESG planning proved problematic.
In addition, companies with sound employee sick-leave policies were better positioned to deal with COVID-19 than companies that scrambled to develop policies to respond to the pandemic. And nonessential businesses that refused to close or stagger shifts to reduce employee exposure, or failed to provide additional cleaning or protective equipment, all fell short of the mark on social issues.
Myth #4: ESG is about being a nice company
It is important that companies distinguish between the things that can have a real positive – or negative – impact on their business.
As important as charitable activity and volunteerism might be, that work isn’t necessarily focused on mitigating business risks. For example, employees reading to disadvantaged students to increase literacy is a worthy cause. But for a company facing challenges with diversity in its workforce, ESG activities with a potentially greater impact might include building recruitment relationships with women and minority students in high schools and colleges and building a more inclusive corporate culture.
Myth #5: ESG is all about profitability for investors
ESG practices can certainly yield stronger company performance and studies have proven that. But shareholders aren’t the only benefactors. ESG is critical to business resilience. Further, integrating ESG in Enterprise Risk Management will improve the consistency and cohesiveness of sustainability-related risk management.  It’s about creating a sustainable and resilient business over time that takes into consideration risks not easily identified in a spreadsheet, so employees have jobs and customers get products and services. What’s more, sustainable companies are where people want to work.