E is for ESG.
Next up in our A-Z of Sustainability, we look at ESG.
ESG is something we hear a lot about, and something which many companies around the world use to improve aspects like their triple bottom line and non-financial metrics.
The ESG pillars provide building blocks for a business to be sustainable and focus on the durability of its business models.
Today, company stakeholders want to be involved with sustainable businesses. This means integrating ESG pillars into business models and providing evidence of this will benefit companies.
We will explore what ESG means and why Small and medium-sized enterprises (SMEs) should care about it.
What is ESG?
ESG stands for environmental, social and governance. These three factors are pillars representing the interlinked framework.
Companies nowadays are expected to report their ESG metrics or targets. This helps to measure a company’s non-financial risks, highlights investment opportunities and reduces client and consumer attrition.
Many companies are now focusing more on ESG taking actionable steps towards a combined goal.
So what does each letter in ESG actually refer to?
- Environmental
Being more conscious of a company’s impact and conserving the environment. An example of this can be a company measuring its carbon footprint and taking action to reduce the impact.
- Social
Ensuring inclusion of people, their rights and relationships. This can include examining employees working conditions and keeping an efficient and effective human resource management team.
- Governance
Prioritising the management of your business and devoting more focus to risk management. Examples include having open and rigorous procedures as well as ensuring legal compliance.
Why is ESG important? Especially to an SME?
Nowadays, a large amount of SME stakeholders are taking ESG factors into consideration.
With global challenges such as climate change, inequality and economic changes increasing, companies have a higher demand to support a framework like ESG so they do not fall behind.
- Client and Consumer Attrition
Other than aligning with investor and risk requirements, ESG metrics often align with the demands of shareholders and clients.
A potential client may require a business to report its ESG metrics before they engage with them. This may include measuring their carbon footprint or using other mechanisms. Similarly, on a B2C level, individual customers may have a strict preference to only work with businesses that perform well in ESG.
- Investment
ESG factors are increasingly being incorporated into decision-making processes. It is well known that SME investors heavily consider business investment returns where there is strong risk mitigation.
As an SME, it is critical to impress and give evidence of a sustainable business model to your investors.
There is a growing importance to prioritise ESG in order to secure capital and investments in the present and future.
- Risk Mitigation
From a risk perspective, companies can use ESG metrics to ensure that they are aware of the long-term risks that will affect their bottom line.
Similarly, if assets are in areas of high risk, such as coastlines prone to flooding or farmland vulnerable to drought, metrics may be able to pre-empt possible disasters.
These transition-related risks are often covered through companies’ ESG reports.
Overall, ESG metrics are becoming more important for businesses of all sizes. SMEs can take advantage of a first mover position by addressing them head-on.
If your company is embarking on its sustainability journey, reach out to us to discover how Alectro's Virtual Sustainability Officer® can swiftly assist you in measuring and managing your carbon footprint.
Let us know who you'd like to see us cover next in our Brands we Love series by emailing hello@alectro.io
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