Why ESG Is Important In Today’s Business Environment

Businesses’ environmental and social impacts can affect an organization’s bottom line. Many companies are taking steps to minimize their impact on the environment, but these efforts are not always visible. For example, the way a company operates can have far-reaching effects on society, the planet, and employees.

The social aspects of ESG can also have financial implications. For instance, an organization’s culture can also have a ripple effect on the community. By fostering inclusiveness in the workplace, a company can create a more sustainable future. While all businesses face challenges in today’s business environment, companies embracing ESG practices are better positioned to identify and respond to strategic opportunities.

Companies must implement immediate sustainability and ESG initiatives to solve the primary problems of net-zero and circularity. Those who consider ESG factors will be valued higher than those who do not. This article will walk you through how ESG is important in today’s business environment.

Why is ESG becoming more critical?

There are numerous parallels being drawn between the unknown hazards of a pandemic and the climate issue, both of which have a significant influence on the global economy. As a result, many investors and politicians have realized a greater need to expedite investments and progress on enterprises prioritizing ESG. After all, our society is no longer just reliant on the government but also on well-functioning enterprises that meet its demands, including job creation, equitable growth, natural resource security, and consumer safety.

In the United States, ESG-focused funds have more than doubled from USD 21.4 billion to USD 51.1 billion, an almost tenfold rise from USD 5.4 billion in 2019. Managed sustainable fund assets in Asia, excluding Japan, nearly tripled to USD 36.7 billion in March 2021 from the previous year.

What are the advantages of ESG policies for your business?

More and more firms are learning about the multifaceted and all-encompassing benefits of ESG, such as attracting talent, addressing future consumers, and supporting brand refinement and innovation. Overall, ESG prepares businesses to be resilient in the present and potential future scenarios. To understand why ESG is more relevant now than ever, let us break down its primary benefits in detail.

1. Contributes to top-line growth

Businesses with a strong ESG approach find it easier to enter new markets and extend their operations in current markets. Governments facilitate the access by offering licenses and approvals to such businesses.

According to GreenPrint’s Business of Sustainability Index report, released in March 2021, 75 percent of Millennials in the United States are willing to pay more for an environmentally friendly product, and 77 percent of the overall sample size is concerned about the environmental impact of the products they buy.

2. This leads to a reduction in the costs

Companies that switch to more environmentally friendly production methods tend to be more efficient and cost-effective. Nestlé, for example, indicated that it will invest up to USD 2.1 billion by 2025 to transition from virgin plastic packaging to food-grade recycled plastics and create other sustainable packaging alternatives. This would not only help it reduce its carbon footprint, but it will also save it money on non-compliance costs in the many regions where it operates, which have more rigid rules governing the use of plastic packaging.

3. Adequate regulatory compliance and stakeholder management

Depending on the marketplaces in which they operate, all firms are impacted by one or more types of rules. Businesses that implement practical ESG standards, particularly in governance, face less scrutiny from regulators and have greater operational independence. They also face little pressure from campaigners, labor unions, and other groups concerned about climate change. Consumers prefer such brands as well. For example, in 2017, Starbucks launched the “Starbucks China Parent Care Program,” which provides health insurance to nearly 10,000 parents of Starbucks employees in China. It was viewed as a strategic decision since Starbucks sought to expand in China amid the escalating trade spat between the United States and China.

4. Attracting talent and increasing employee productivity

It has been shown that strong organizations with high ESG scores recruit superior people and have higher retention rates. Employees feel a sense of pride when their company has a defined environmental objective. The younger generation chooses to work for organizations that have higher societal commitments. According to a 2016 Cone Communications report on Millennial Employee Engagement, 64% of Millennials evaluate a company’s social and environmental responsibilities when considering where to work.

5. Build brand image

Depending on the markets in which a company operates, ESG measures can influence the company’s performance. A good ESG performance can boost a company’s brand’s reputation. Regardless of the industry, it is crucial to consider the long-term effects of the business on society. The positive impact on the environment can be felt across a company’s bottom line. An excellent ESG performance can help the firm compete with other companies in the same industry.

A strong ESG performance will improve an organization’s reputation and expand into new markets. Additionally, a good ESG performance will also help an organization attract top talent. The underlying social and environmental issues are closely connected to the company’s bottom line. If these issues are not addressed, it could negatively affect its performance. A strong ESG score will improve the organization’s reputation and make it more desirable to the public.

6. A good ESG strategy can help your business better identify the opportunities

The ESG metric helps companies assess their social and environmental impact. By assessing the ESG indicators of a company, they can better identify strategic opportunities and mitigate the challenges faced by consumers and the public. The adoption of ESG metrics can help an organization attract top talent and reduce costs. It can also increase its brand’s social influence among customers. This can be beneficial for the company.

While companies must consider their activities’ social and environmental impacts, the broader societal implications of these issues are just as significant. In addition to assessing their impact, companies should also consider the effects of their actions on the environment. For example, improper use of natural resources can negatively impact the company’s reputation, and damaging the ecosystem could lead to expensive litigation. Therefore, ESG is crucial in today’s business environment.

Summary

While giant corporations can afford to have a specialized team to oversee and benefit from ESG measures, small businesses can benefit from speedier decision-making, flexibility, and greater interaction with their consumers, allowing them to understand their needs better. Small ‘green’ initiatives done by small businesses, such as converting to greener packaging, digital receipts, the use of renewable energy, and innovative waste management, can go a long way toward helping them save money and reduce their carbon footprint.

Small and medium-sized enterprises (SMEs) with a strong ESG focus will be better positioned to attract interest as investors seek to invest more in companies with high ESG criteria. High ESG standards minimize the risk profile of SMEs by increasing top-line growth and decreasing operational and regulatory problems.