Embedding ESG into any business

ISLAMABAD:

As an environmental, social and governance (ESG) entrepreneur, I often get asked questions like “I own a software company, I do not need to worry about ESG right?” To that, my response is “yes, if you are not factoring in the 10 international business trips you take a year, generating more than 20 tonnes of CO2, equivalent to 120,000 km of driving in a diesel car.” That usually stops the person dead in their tracks and they express desire to learn more about the concept of ESG integration.

ESG integration is the process of managing environmental, social and governance risks which might harm companies and their stakeholders including the employees, customers, suppliers, society and the environment.

We are long past proving that ESG integration is not only good for the world but also good for business. A study by McKinsey concluded that “the value at stake from sustainability (ESG) concerns can be as a high as 70% of earnings before interest, taxes, depreciation and amortisation,” which means that up to 70% of earnings could be wiped out from a business due to ESG risks.

A study found out that from 2006 and 2010, the top 100 sustainable global companies experienced significantly higher mean sales growth, return on assets, profit before taxation and cash flows from operations in some sectors compared to control companies.

Three questions

So how does one embed ESG into their business? As a practitioner for over 12 years and pursuing a PhD on the topic, I want to suggest three simple questions which will allow you to embed ESG into your day-to-day operations, regardless of the size and nature of your business.

The first question is what is the impact of our business on water, energy, waste and carbon emissions and how can we minimise the impact on environment.

The second one ¬¬is how can our businesses maximise quality of life for our people (employees, management, suppliers, community) especially the vulnerable groups (minorities, women and those with special needs).

The third is that are our businesses compliant with all government regulations, internal policies and high ethical standards and how can we ensure we ensure a high code of conduct?

Asking ESG questions

Just imagine what would happen if a major business would consider these three questions before a review or decision was being made. Aside from making it more responsible in its community, would it not change the culture of the business and employees?

The answer to this is a resounding “yes.” Asking questions about ESG reaps major benefits to the business. Firstly, it increases employee responsibility and engagement. Many studies have proven that employees are more engaged with employers who have a higher sense of purpose and responsibility to the communities they operate in. Employees consider it a source of pride to work for a responsible organisation which not reaps benefits from the land but also pays back as well.

Corporate responsibility performance positively impacts turnover and recruitment. Studies show that firms with greater corporate responsibility performance can reduce average turnover over time by 25-50%. It can also reduce annual resignation rates by 3-3.5%, saving replacement costs by up to 90-200% of an employee’s annual salary for each retained position.

Secondly, asking ESG questions is a form of risk and cost management. Every major industry including agri-business, textiles, chemicals, manufacturing and transportation, has natural resource risks tied to it. Asking questions about water, energy and waste moves the company towards a conservation approach and more responsible use of natural resources, decreasing costs in the process.

Risks associated to human rights might be less common but when they occur, they are much more pronounced. Imagine a major physical or sexual harassment case breaking out in your company. How would that affect the reputation of the firm, employee morale and other factors? Asking questions about equity on a regular basis keeps people aware that such values are important to the company and that discrimination and harassment will not be tolerated.

We are long past proving that ESG integration, which includes the management of environment, social and governance risks and opportunities, is good for business. As we begin the year 2022, the question we ask as business leaders should not be “if ESG is applicable to my business?” but rather it should be ”how do I embed an ESG approach into my business? ” Hopefully the three questions above will allow you to begin that journey.

The writer is a doctoral researcher at the University of Waterloo on ESG and Private Capital Markets and founder of ESGTree.com, a tech start-up platform

 

Published in The Express Tribune, February 7^th, 2022.

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