What does ESG stand for, and what does it mean in business?

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What does ESG stand for and what does it mean in business?

ESG, which stands for environmental, social, and governance, is a framework used to measure a company’s commitment to these critical areas. Essentially, it’s a way to gauge how ethical a company is by examining its environmental stewardship, social impact, and governance practices. For example, it looks at whether a company actively tries to reduce its environmental footprint, engages in initiatives that benefit society, and whether company leadership is trustworthy and transparent. Workplace technology can play a critical role in supporting ESG initiatives by helping companies monitor and improve their performance across several areas. The answers to these contribute to an overall ESG score, reflecting the company’s conscientiousness and ethical standing.

So who assigns these scores and why?

ESG scores are typically provided by specialized research that assess a company’s performance across various ESG criteria. For example, firms like Bloomberg, S&P Dow Jones Indices, Just Capital, and MSCI analyze every ESG aspect of a company to generate an ESG score.

As for why, that has to do with ESG’s meaning in business. The ESG is primarily a tool for sustainable investing firms to gauge where they want to put their money. Global financial powerhouses like Vanguard and Blackrock favor businesses with higher ESG scores. Beyond the appeal to investors though, a strong ESG score can positively impact your workplace culture and enhance your brand’s reputation more broadly.

This leads us to the next question: how do research firms determine these scores?

Let’s examine how scores are determined for each of the ESG Factors: Environment, Society, and Governance.

Sustainability is a major component of ESG scoring. Research firms calculate scores based on how much the company impacts the environment. They categorize it into three basic categories: emissions, innovation, and resource use.

Emissions refers to the various pollutants a company releases into the environment, including CO2, water pollutants, and waste that affects biodiversity. Innovation involves research and development in green and sustainable technology. Resource use covers the consumption of water and energy consumed by the business and whether this can be reduced.

The S in ESG stands for social factors, made up of four categories – community, human rights, product responsibility, and workforce.

Community involvement focuses on a company’s engagement with local initiatives, such as improving healthcare and education. Human rights scores assess how well a company’s policies and practices impact any individual’s human rights. Product responsibility relates to how products affect society, including responsible marketing, product quality, and data privacy. Finally, the workforce score evaluates diversity and inclusion, career development, working conditions, and health and safety.

<H3> Governance factors </H3>

Governance factors are primarily internal. They relate to a company’s management structure, common leadership practices and makeup, and how much the company adheres to ethical business practices in its policies. Like the other factors, this consists of multiple categories: CSR strategy, management, and shareholders.

A corporate social responsibility (CSR) strategy is an internal business plan developed by the company itself to promote social causes. This strategy typically includes guidelines surrounding charities to donate to, policies to help local populations in various ways, and specific policies to promote a cleaner environment and safe products. Management aspects cover the internal workings of a company, while Shareholder considerations focus on protecting the rights of external shareholders.

With this basic understanding of the ESG scoring process, let’s look at the steps needed to improve your score.

Until now, we’ve discussed ESG initiatives in broad terms, such as benefiting people and the environment. However, translating these into actionable steps can be challenging as you need to develop specific actions tailored to your company. Here are four practical steps that can be applied to any business:

A materiality assessment is a process of breaking down the functions of how your business works and noting all the places where it intersects with both the environment and society. For example, if you run a fast-food chain, a materiality assessment would show things like how much your food waste impacts the local environment, how much carbon emissions come from your grills and cooking appliances, and what impact the calories and ingredients in your food have on public health.

Communicating this information to stakeholders is imperative in getting buy-in – and for that, you need the right technology, allowing you to present complicated information in ways that are easy to understand. Materiality Assessments also show places where your business has very little impact and therefore scoring in that area would have very little weight. ESG research firms don’t expect a fast food chain to fight cybercrime or fund higher education as part of their business. So, not doing those things won’t lower your ESG score.

Just like any other large-scale project in business, you need to have clear and reachable goals to measure progress. Tools like an impact-effort matrix can be helpful in the planning phase. You also want to be sure to align your overall business objectives with your ESG initiatives. For example, aiming to reduce food waste by 50% in the next 5 years is relevant to running a fast food chain, whereas planting a dozen trees is not.

This is not to say that aiding society by planting trees or running an after-school program would hurt your ESG score, but it’s not a key expectation in the assessment. Once you have a strategy, develop a timeline and outline specific steps that correspond with the criteria laid out in ESG evaluation documentation.

Exactly which policies and procedures you will change depends entirely on what you came up with in step two. But, there are still quite a few areas that are common to most businesses such as human resources, supply chains, and energy consumption.

To look back at our example, the fast food chain might implement parental leave policies that exceed legal requirements or offer scholarships to students who are working part-time. The procurement department could ensure their food source sustainability and audit suppliers and supply chains to make sure their ESG score is high. In operations, the department may work to purchase more energy-efficient grills and deep fryers. In all these cases, workers will need some retraining on everything from employee behavior to new equipment. Make sure you have the right technology to make that happen from a company already bettering the community.

Work with ESG research firms to find the most relevant rubric for scoring your business. Depending on your ESG scores you may publish annual sustainability reports to highlight your improved score. Other key aspects involve analyzing data to see how well your changes are working, making adjustments as needed, and sharing information with investors, employees, and the public.

Achieving a high ESG score can be challenging, but it can have a significant payoff in the long term. It’s important to remember that it’s not only about having a high score – the steps your company will take to achieve a high score will also impact your workplace culture, policies, and employee engagement.

In taking the steps needed to raise your ESG score, you will need to communicate with all of your workers and work towards a single vision based on your company’s values. When done right, an ESG improvement strategy should incorporate your company’s mission statement and core values. This means that your employees see the bigger picture of why they’re doing what they’re doing. When your company does something that helps the community, don’t just communicate that to the public but to your workers as well. Email all your employees about it. Make a slideshow communicating who you’ve helped. Invite people who have benefited from what you’ve done to come and talk to your workers so they can see firsthand the impact they’ve made. Steps like these will encourage your people to keep at it by showing them the good they’ve done.

Changing your ESG score also ties directly into your company’s policies. Workers on the ground are impacted daily by how your company deals with waste management, implementing fair labor practices, and addressing human rights issues up and down the supply chain. Practically speaking, you can set goals around how much you will reduce waste within the next year or offer paid time off for employees who volunteer at charities. Also, educate your employees on how they fit into the governance of the organization. Don’t just assume they understand how to make their voices heard – hold town halls, online votes, or whatever strategy fits your company’s policies so that employees know they have a voice.

Employee engagement is key to improving your ESG score. There are a few practical ways to get employees to participate and build interest in helping those around them through ESG initiatives. Consider workshops on sustainable practices or local charitable organizations. Offer training in how to check for fair labor practices in other companies up and down your supply chain. Give awards to employees who have gone above and beyond. Conduct surveys and meet with workers to maximize buy-in and address any concerns they may have.

The ESG score is also integral to modern financial performance. As noted, many of the world’s leading investors have high ESG scores as a prerequisite for investment – which means if you want to expand beyond a small business, it’s going to come into play. That said, there are other benefits as well. For example, renewable on-site energy generation means adverse weather conditions and power outages have less of an impact on you and your workers, and lower carbon output also means you can avoid a high carbon tax.

If you are looking for ways to enhance your ESG outlook and are looking to partner with purpose-driven companies, we provide innovative and user-friendly technology to help you succeed in both traditional and flexible work arrangements.

Achieving a high ESG score is challenging and requires significant effort and changes to companies. Here are some key challenges and obstacles with ESG in the workplace:

Most of the changes ESG requires are universally positive. Still, it’s worth noting there have been some critiques of the ESG scoring system for pushing particular political ideologies. That’s why it’s important to consider your company’s values when deciding what to focus on when boosting your ESG score.

Another logistical problem is data collection and reporting. In addition to human error, comparing ESG scores between completely unrelated industries can yield results that aren’t particularly meaningful.

Additionally, greenwashing – creating the appearance of an environmentally conscious business by making false or misleading claims – is another issue that often comes into play. When discussing or publicizing the impact of any ESG initiative, make sure you have the data to truthfully back up all of your claims.

While no system is perfect, ESG initiatives can offer significant benefits when implemented ethically and thoughtfully in any business. Looking ahead, certain trends are already taking shape. Despite the complexity of global supply chains, ESG is working towards identifying and addressing unfair worker treatment along the supply chain. If this continues, we could see a future with fewer overworked and underpaid employees globally. The ESG also will likely continue to improve worker treatment in general, improving worker compensation and work-life balance.

Successfully launching ESG initiatives requires strong support from your entire company and extensive training. Educating workers on new policies, procedures, and protocols requires clear communication from department heads and managers.

Book a free demo and learn how Promethean’s top-of-the-line interactive technology and how it can transform your business.