What is ESG? Environment, Social and Governance 101

Business owners searching for people to invest must prioritize ESG so they can attract the attention of other investors and leave a positive mark on the world as a whole.

What is ESG?

ESG is a set of evaluating criteria helping people determine whether they want to invest in a particular company. These standards allow them to see how ethical and sustainable a business is through its practices and policies. Potential investors will look to see how a company's policies affect the environment, treats its employees and chooses to run the administrative branch.

Environmental (E): Some of the environmental elements people may wonder about include how a company regulates energy use and carbon emissions. Does the business they want to invest in prioritize the future of the environment and fight against climate change?

Some factors in the environmental portion of ESG:

• Greenhouse gas emissions
• Water use and pollution
• Preparation for climate-change related weather events

Social (S): On the social end, people want to know how a company treats employees and if it’s actively expanding diversity and inclusion initiatives. While social responsibility can mean different things to different groups, there are some common factors considered when evaluating a company’s ability to handle social issues.

Some factors in the social portion of ESG:

• Employee satisfaction, retention and compensation
• Due diligence in building relationships with ethical companies across the supply chain
• Environment, health and safety management
• Meaningful DEI initiatives surrounding gender, race and other underrepresented groups
• Community impact and donations

Governance (G): The governance aspect relates more to the administrative side and how leadership works, including regulatory compliance and financial reporting. When an entity keeps this information transparent, it builds trust and can potentially draw more people to them.

Some factors in the governance portion of ESG:

• Alignment of leadership incentives to stakeholder expectations
• Controls for leadership transparency and accountability
• Avoid conflicts of interest in leadership

Why do people care about ESG?

People place a lot more value in the future of the planet and society. They want to invest in something that’ll last — businesses working toward the betterment of the future make them feel confident about where their money is going. News stories and documentaries reporting on the latest developments of climate change have altered how people look at the environment.

It's important to remember those who invest in companies aren’t just individuals — mutual funds, brokerage firms and more will look to ESG as a guideline for large-scale investments. Investors want to be promoting the best possible practices for people and the environment alike, not just for goodwill but because a long-term view is indicative of financial and organizational success.

ESG is becoming necessary for many businesses, with half of all professionally managed investments expected to be ESG-mandated assets by 2025. When companies disclose their ESG, they get more attention and are held to a different standard rather than just checking off boxes to seem better in the public eye. This way, they can continue to work toward better practices while their customers hold them accountable.

How to build an ESG-friendly business

Companies will want to convert to ESG standards as soon as possible, especially since the pressure is on them to meet the expectations investors have. Businesses that want to adhere to best ESG practices must ask themselves a few questions to ensure they're making the right changes to keep people interested.

1. Consider the future

Working toward a better future might seem idealistic, but it’s simply reflective of what the greater population expects of modern businesses. Over half of employees believe their businesses should work toward supporting diversity — and it makes sense. Inclusion can change how people look at issues and diversifying the workforce and administration can help people see new solutions or view problems in a new light.

This isn’t purely a social good consideration, either. Investors are considering how well-prepared organizations are for risk, whether that be a public pushback against unethical practices or a failure to attract top talent in a changing workforce. Companies that are prepared to shift toward environmental, social and governance best practices are widely seen as healthier, safer bets for investment and funding.

2. Prioritize data management

In a world where everyone is online, data becomes a vital resource companies must protect. Investors may want to know how businesses handle their data, including sensitive information, employee data and saved information from customers and clients.

Around 65% of people lose trust in a company once it's experienced a data breach, likely because they believe the entity doesn't prioritize their sensitive information. While there's no foolproof way to prevent a data breach, businesses can take measures to protect their users' privacy and lessen the chance of a cyberattack targeting them.

3. Practice transparency in leadership

Governance scandals can topple in high-performing businesses. High-profile scandals have made a splash in news and media, with big-budget dramatic retellings of corporate malfeasance in WeWork and Theranos highlighting how much of the public is tiring of unaccountable tech titans.

The governance portion of ESG can help leaders:

• Keep business interests, stakeholder needs, environmental and social goals aligned and accountable
• Maintain compliance on financial records and regulations
• Keep up clear, two-way communication with employees to build company trust
• Help ensure the organizational hierarchy is helping information flow well and that compensation practices are ethical and transparent

Work toward a brighter future and reap benefits

Nearly every business can grow in the best way by making selfless decisions. Those choices should champion diversity and inclusivity while benefitting the environment — or at least actively working toward not harming the planet while carrying out processes.

Companies should strive to make these decisions with the betterment of society and the Earth in mind rather than gaining more investors. Once a business starts making the best decisions it can, investors will show up and evaluate whether they find it worthy of investing in.