The landscape for integrating ESG criteria in businesses is rapidly changing. Regulators, investors and other stakeholders are focused on corporate disclosures regarding climate-related and social issues. There is a need for a transition in our thinking and actions in this area.
Why does ESG integration matter for a company?
Changes in consumer demand are beginning to affect the corporate bottom line as consumers are increasingly aware of ESG practices. They have higher expectations of the companies behind the products to operate their businesses ethically and responsibly, and demand greater transparency about how they conduct their business. Millennials are willing to pay more for products and services regarded as sustainable or coming from socially and environmentally responsible companies.
Reputation could be put at risk if a company does not perform well in the ESG space, such as the hiring of child labour by the company or its suppliers. This may lead to negative publicity, and boycotts by the media as well as customers, given that we are in an era where social media connects the world and spreads information at an unprecedented pace.
Companies that pursue sustainability are more likely to gain the benefits of having better employee attraction, retention, engagement and productivity. By 2025, millennials will comprise 75 percent of the workforce. They have high expectations about social purpose and expect accountability in the companies they work for. They seek to work for companies that uphold these values and align with their own.
The importance of ESG on supply chains
The growing importance of ESG factors is changing attitudes toward supply chains. A recent shift in focus from shareholders to stakeholders, emphasizing longer-term risk management, has redirected attention to ensuring suppliers and customers are treated ethically. This has increased scrutiny of environmental issues, with boards, shareholders and consumers increasingly influenced by supply chain considerations.
Concerns over how sourcing, manufacturing and distributing goods may contribute to issues such as global warming have increased for all businesses. In a recent BofA Global Research survey, analysts found that companies in 75% of global sectors in North America and Asia Pacific and 67% of those in Europe expect to face additional scrutiny in this area. A move toward moving operations to more environmentally aware countries is now accelerating. COVID-19 has also played a part in the move by revealing the risks of supply chain concentration, with companies in more than 80% of global sectors experiencing supply chain disruption during the pandemic.
Rethinking global supply chains with an ESG lens may ultimately help reduce costs, especially when you compare the short-term costs of moving production from cheaper regions to the longer-term implications of reputational damage. According to BofA, ESG Research Team, “Controversies can be costly, and the stigma tends to be long-tenured even after the problems have been addressed.”
On top of corporate and shareholder pressure, growing consumer consciousness about the impact of certain sourcing practices on the environment is feeding into decision making. Green consumerism is growing fast, and is forecast to reach 30% of grocery sales in the U.S. by the end of 2021. In Europe, eco labeling is becoming more common, with nearly 80,000 products now displaying the EU’s Ecolabel logo.
The value of an ESG strategy
Companies are becoming increasingly aware that corporate financial statements alone are not necessarily sufficient in determining the company’s access to capital, cost of capital, the likely environmental and social risks that it may face, and the way in which these risks are managed. Whilst in the past companies may have made decisions based largely on a company’s track record, they are increasingly looking to the future. ESG reporting reflects management strength and engenders investor confidence in the long-term prospects of the company.
The impact of ESG issues on financial risks can be minimized if there is a strategic approach that is forward-looking and reflects the long-term interests of the company. Therefore, it is important for companies to develop an ESG strategy to respond to and manage such risks. In particular, the board of directors should have oversight of and assume the overall responsibility for the company’s ESG matters and strategic direction.
Net Zero Analytics (NZA)
We research and consult on an array of Environmental, Social and Governance (ESG) issues that impact organisations, their stakeholders and our changing world.
Our sphere is anything touched on by the UN Sustainable Development Goals, including responsible consumption, reduced inequalities, and better health and well-being.
We research and consult on an array of Environmental, Social and Governance issues that impact organisations, their stakeholders and our changing world. NZA provides assessments on the level of ESG compliance of corporate entities surfacing all material issues and benchmarking them against peers. The backbone of our operations is that of data analytics where we cover over 200 criteria in the following areas:
Environmental
Energy management, environmental awareness, GHG emissions & air quality, waste & hazardous materials management, water & wastewater management
Social
Customer welfare / fair messaging, privacy & data security, employee wellbeing, human rights, community relations, access & affordability, labour relations & practices
Governance
Customer welfare / fair messaging, privacy & data security, employee wellbeing, human rights, community relations, Board independence & effectiveness, ownership concentration, group structure, complexity and related party transaction
Currently NZA has a number of specialized ESG research analysts that collect ESG data from a number of sources. NZA has created its own proprietary database which is continuously expanding. Currently we cover the entire Greek market of entities having published sustainability reports and rapidly our database is being enriched with ESG metrics from entities throughout Europe.