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Why an ESG strategy is key to future business growth

ESG is not to be confused with ESP

17 Jun 2021

Firstly, let’s not get ESG confused with ESP…we are not talking about a sixth sense here!

So, what exactly does ESG stand for and mean? And why is it important for management to consider ESG within their long-term business plans?

ESG stands for Environmental, Social and Governance and refers to the three key factors when measuring the sustainability and ethical impact of a business. These factors are non-financial measures which are used by investors to evaluate the management of a business.

You may have heard of ethical investing, where investors steer clear of perceived negative industries such as tobacco, fossil fuels, weapons, etc. Similarly at the other end of the spectrum you have sustainable investments in things like solar and wind farms. What ESG looks at is the investments in between, based on an assessment of a number of individual company factors within those three key areas.

Environmental factors when assessing an investment will include items such as climate change strategy, water efficiency and carbon emissions. We are already seeing this creeping into UK financial reporting, as all large and publicly listed entities now have to publish details within their financial statements relating to streamlined energy and carbon reporting. These not only help investors benchmark carbon usage between companies but also gives an insight into management’s approach to reducing carbon consumption in the future.

Social factors include an organisation’s approach to diversity, health and safety, human rights, working conditions, and impact of local communities. We regularly read reports that FTSE company boards are still male dominated or lack diversity.

Governance factors include an assessment of a business’s attitude to, and strategy to address, executive pay; tax strategy; board diversity; political lobbying; and donations and corruption. Again think headlines declaring that ‘Fat Cat’ CEOs are paid the average annual UK salary in the first week of the year, or companies using tax schemes to pay little or no UK tax on large profits.

Increasingly investors are looking at their investments in companies to be sustainable. That’s not to say they are not investing to make money, but looking at these non-financial measures may be a wiser long-term investment strategy. The companies that will thrive in the future are likely to be considering the changing world and public attitudes right now and a strategy in place to ensure they remain ahead of the curve. The benefits of this forward thinking allow for business innovation, improved reputation, brand loyalty, and being well prepared for regulation – all factors which should lead to business resilience, which is particularly important as the world comes out of the Covid-19 pandemic.

A recent report has shown that the largest global investment asset managers have all signed up to the United Nations Principles for Responsible Investment, which has helped firmly move ESG investing from being a niche area right into the mainstream. Business owners should certainly be looking at these non-financial metrics and asking themselves how their organisation can maximise their ESG potential in line with their individual company ethos and vision.

If you have any questions, please do not hesitate to contact us.

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