Why Should a Company Implement ESG Criteria?

August 23, 2022
Brooke Layton

Since the term ESG was first used in the 2004 report titled “Who Cares Wins”, the support and use of an ESG approach has grown significantly. Through focusing on environmental, social, and corporate governance (ESG) criteria, companies have moved to align their investments and efforts with their values. In addition to the obvious positive social impact ESG, a strong ESG proposition can create value for your company and shareholders while investing in the long-run interests of your corporation.  

Capitalize on ESG-oriented investing.  

ESG-oriented investing has seen massive growth over the past years, with global sustainable investment now reaching over $35 trillion in 2020, up 15 percent in just two years (2018-2020) and 96 percent since 2004.1 In addition, many mutual funds, advisors, and brokerage firms offer investment advice using ESG criteria, prompting investor big and small to consider ESG factors. Many of the world’s largest investment firms actively promote ESG investing, including BlackRock2, Fidelity3, and Morgan Stanley4. Even on a local scale, investors and customers are seeking companies that create societal value in their business practices. Integrating ESG into your own company gives you the opportunity to realize the benefits of social and environmentally-conscious investing practices.  

Increased Opportunities  

Companies with a strong ESG proposition may have greater access to resources, relationships, and customer trust. When government authorities trust a company to act ethically and for the social good, they are more likely to reward the company with access and approvals, opening opportunities for growth. Commitment to a ESG proposition also builds trust with your community as corporate actions demonstrate a dedication to mutual values. In addition, today more than ever before, customers are aware and concerned about the social impacts of the businesses they use. Effectively implementing ESG enables your company to maintain strong relationships with customers and benefit from a growing consumer social interest.  

Reduce Costly Behavior

Implementing ESG criteria may benefit your company by reducing unnecessary costs and increasing profits. Environmental commitments may especially reduce costs and help combat the rising operation expenses. Research by McKinsey found that effective executing of ESG may reduce operating profits by as mush as 60 percent5. Implementing ESG criteria into your business also helps you establish standards to avoid unethical practices that can lead to costly litigation, fees, and loss of investors. Many investors use ESG criteria so they may avoid companies engaging in such behaviors.  

Despite the promise of implementing ESG criteria, the approach has also received criticism for allowing companies to tout values and goals that appear socially responsible but continue practices that contradict them. Greenwashing your company to seem more appealing to investors and customers without putting ESG into practice is ultimately a disservice to your stakeholders, your community, and your company. As your company moves forward with ESG, ensure it does so honestly and intentionally. Not only will this maximize your company’s positive social responsibility, you will benefit from the growing movement of responsible investing.  

If you have questions about how you can help your company be a leader in the world of ESG, contact one of our experienced professionals at Sumsion Business Law. We can help you create a plan in order to succeed not only financially, but also with your environmental and social responsibilities.

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