ESG disclosure is continuing to evolve. The shifting goalposts make disclosure seem overwhelming and complex. To remove complexity, start small and simple then continue to mature and progress. Otherwise, it is easy to become overwhelmed by the unfamiliar. That said, where do you start? But first, an introduction to ESG and a look at how a strong ESG approach creates value.
What is ESG?
ESG (Environmental, Social, and Governance) is a framework used by investors. ESG assesses responsible investment, and an organization’s ability to ensure long-term value. To break it down:
- Environmental refers to an organizations environmental impact. Including natural resources, pollution, waste, and climate change.
- Social refers to an organizations societal impact. Including human capital, health and safety, labor management and community.
- Governance addresses an organizations leadership practices. Governance includes corporate governance, risk management, and stakeholder engagement.
ESG Value Creation
A strong ESG position creates long-term value. Below is a selection of a few interesting articles on ESG value creation – follow the links to read more:
Financial Performance
A paper called Investing for long-term value creation, in the Journal of Sustainable Finance & Investment quotes evidence for the ESG business case. With a statement that “companies that perform well on material ESG issues, also show a superior financial performance”.
Attract Investment
A Gartner article titled “The ESG Imperative: 7 Factors for Finance Leaders to Consider” showcases the growing interest in ESG investing. The article publishes a finding that “85% of investors considered ESG factors in their investments in 2020”.
Long-term competitiveness
An insight article by S&P Global highlights the competitive advantage of integrating ESG principles. The article opens with a statement that “Research is increasingly showing that companies which do not integrate environmental, social and governance (ESG) factors into their business strategy put their long-term competitiveness at risk.”
Attract and Retain Employees
A Harvard Business Review article explains ESG’s impact on attracting new employees and retaining existing talent. The article states that “for employees, robust [ESG] scores can represent pride and engagement. For recruits, they can represent meaning and purpose, critical factors now to win the competition for talent needed to keep companies sustainable”.
The ESG value creation examples continue. Strong ESG strategies also assist with:
- The management of risks and opportunities.
- Cost reductions through efficiencies and innovation.
- Preparation for current, imminent, and future ESG-related legislation.
Where to start
With ESG value creation in mind, the next thought is often, “so, where do I start”. Because ESG incorporates many factors, a good place to start is understanding materiality. Material ESG topics impact the long-term success of a business and are considered important to stakeholders.
Publicly available materiality mapping tools aid in determining material issues for different industries and companies, these tools include the MSCI ESG Industry Materiality Map and the SASB Materiality Map.
A brief three step approach to get started:
- Step 1 is for an organization to get a grasp on their material issues.
- Step 2 is to gather and collect data on the material issues. Reliable non-financial data collection allows for a seamless transition into step 3.
- Step 3 is to use ESG reporting frameworks and standards to report on progress against the material issues. Consistent reporting improvise transparency to investors and stakeholders.
How can IFS help?
The IFS Cloud Sustainability Hub is a Microsoft Teams application. The application intends to assist companies with their non-financial data requirements by providing a simple form-based method for communicating, gathering and collating ESG information. If you are interested in finding out more, please email me on caitlin.keam@ifs.com
