Recently, I had a conversation with a lawyer friend who works with many startups. We were updating each other on business when something I mentioned made him stop and ask me a question. “I keep hearing you and others say ‘ESG.’ What does that mean?” It was a reminder that the niche area I’ve been in for eleven years is becoming more mainstream. It also showed that those of us familiar with this field often speak a different language, filled with a jumble of confusing acronyms like GRI, SASB, MSCI, SCRD, TCFD, SFDR, CDP, and SDGs, to name a few.
What is ESG?
ESG stands for environmental, social, and governance. It is a framework that focuses on a company’s environmental, social, and ethical practices. This term was mainly used by investors to describe those who considered not just financial returns but also ESG factors in their decisions. However, its use has grown as companies aim to establish and implement goals in these areas, assess suppliers based on these criteria, and respond to the increasing interest from consumers and employees. The terms “Impact” and “Sustainable” are often used in place of ESG.
Why Does ESG Matter?
If you are in a leadership position of a company, it matters tremendously. First, nearly 1 out of 4 investment dollars now has an ESG lens, meaning they will look at your ESG data as part of the investment. Second, companies with strong ESG track records outperform those that don’t. Third, employees, particularly young ones, won’t work for a company with a poor ESG record. Fourth, your customers, both businesses and consumers, are starting to evaluate your ESG practices as part of their buying decisions.
What Else Do You Need to Know?
What is included under ESG is not standardized. There are numerous, constantly evolving, reporting frameworks that cover everything from carbon emissions to inclusivity practices to information security and privacy. The acronym soup is particularly heavy among the various reporting frameworks including the Carbon Disclosure Project (CDP), Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB) and ratings agencies like the Morgan Stanley Capital Index (MSCI). The Davos Manifesto, issued last year at the World Economic Forum, is a work in progress but is aligned with the International Business Council signatories and the Big 4 accounting firms so could emerge as a more shared standard. If you are truly curious, Goby maintains an ESG glossary.
As companies seek to set ESG goals, an increasingly common guiding light are the United Nations Sustainable Development Goals (UN SDGs), a set of 17 ambitious goals for 2030 that range from no poverty to affordable and clean energy.
The first step in an ESG journey is often a materiality assessment, or an evaluation of what factors within ESG have, or will have, the biggest impact on your business from both a risk and opportunity perspective. From there, you can develop a strategy and goals. For example at WeSpire, our most material emissions impact is the energy consumed at the data center from the usage of our product. Which means that it is very important to us that our supplier has made a commitment to renewable energy. Another highly material factor is diversity, given the tech industries generally weak track record for gender and racial diversity. A third highly material factor is privacy and data security.
Nearest and dearest to my heart is the connection between ESG, innovation and your people. When you start down this journey, some of the steps won’t be that difficult. But eventually, you will need, or want, to rethink some fundamental aspects of your business. Your own employees are your secret weapon. By getting them actively involved in your ESG efforts, it’s like giving them a new set of glasses to see the world through. What problems they solve, or solutions they invent, as a result will not only amaze you but make you a better, stronger business.
Quote of the Week: “Companies that are breaking the mold are moving beyond corporate social responsibility to social innovation. These companies are the vanguard of the new paradigm. They view community needs as opportunities to develop ideas and demonstrate business technologies, to find and serve new markets, and to solve long standing business problems.”
Rosabeth Moss Kanter