Just the other day I was thinking there aren’t enough acronyms in the world. Luckily, another one is quickly gaining prominence in the lexicon: ESG.
Many readers probably know what it stands for — Environmental, Social and Governance — but I suspect few understand exactly what it can mean for your organization, or how to successfully integrate it within your on-going strategy and culture.
Don’t be alarmed. This column hopes to help you navigate this emerging landscape.
To give you an idea of the momentum behind ESG, Armando Senra, Blackrock’s head of iShares Americas (the company’s ESG fund), recently told CNBC that ESG investments could top $1 trillion by 2030.
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Tony Paradiso
Yet even the people involved in the “business” of ESG struggle to define it. As with any new benchmark, no standards exist. The myriad rating agencies that “score” a company’s ESG rating are basically making it up as they go along. That will change in time, but for now, for most companies it comes down to a judgement call.
The goal is not to generate an ESG rating for public relations purposes. Rather, it is to develop a plan to integrate it within your overall organization not only to improve your business, but the world around you.
Unless you’re a public company, you can ignore the ratings agency chaos. And the reality is that you should never run your company based on other’s interpretation of what you as a business owner should be doing. What’s right for you with respect to ESG is totally dependent upon the unique characteristics of your business and culture.
I think there is general consensus as to what ESG encompasses, so let’s start there.
Environmental
With the growing focus on climate change, this is arguably the most prominent of the ESG components. It can encompass myriad aspects of a company’s environmental impact. For most companies, it would include energy use, carbon footprint and resource utilization. But for others, very specific environmental criteria might become priorities. For a pharmaceutical company, the treatment of animals would be a critical factor. For agriculture, a major issue would be water usage.
Social
The social component doesn’t only pertain to how you treat your employees but all your company’s stakeholders. The challenge here is the breath of the stakeholder population. A narrow definition of a stakeholder includes employees, shareholders, the community, creditors, investors, customers and owners. However, under the broadest definition, it would be virtually everyone potentially affected by your business — suppliers, competitors, prospective employees, customers and even future generations.
Governance
Governance issues are greatly dependent upon whether your company is public or private. With public companies, stockholders are a focal point as is the composition of the board of directors. For private firms, transparency in accounting, risk management, and data privacy come into play.
These lists represent only a subset of possible variables related to ESG. Still, they illustrate the unending number of permutations that can exist in attempting to formulate the right policies for your organization.
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October 04, 2021 at 10:38PM
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