For any business, developing and maintaining a sustainable finance plan going forward, particularly when considering investment decisions, is typically referred to as considering Environment, Social and Governance (ESG) factors.

The aim of this ESG approach is to improve longer-term investments, and strengthen sustainable economic initiatives, activities and practices. Trying to summarise ESG in a short sentence, or even a paragraph, is difficult. It covers a wide range of actions, processes and projects that are all focused on performing a duty of good citizenship to the environment that a business operates in. This will include a responsibility for the physical environment, and its sustainable development. It will also focus on the management and development of the people that the business interacts with, both its immediate and its less obvious stakeholders. Enveloping all of this, there will be a role in ensuring high ethical standards are set and maintained throughout the business.

For some businesses, already busy with a multitude of challenges, it may be tempting to simply go for a ‘fire-fighting’ approach, deal with issues as they arise, make sure not to break any rules, and make plans that seek to operate with the future in mind. To be fair, many organisations begin at this level, but, sad to say, some remain in this kind of ‘spontaneous reactionary approach’ mode for far too long. Simply attaching ideas, policies and plans onto what is already happening in the business is not likely to produce anything sustainable or truly beneficial. However, by seriously incorporating ESG into the overall business strategy of an organisation, a long-term thinking will be engaged that is aligned with sustainability targets and leads to a wider range of benefits in every element of the organisation. Developing such a sustainable and strategic approach works for a wide range of reasons and will lead to a plethora of benefits, including the following:

  • Production costs will be reduced: Sustainability leads to a reduction in the amount of resources required for any particular process, and such sustainable practices improve efficiency, streamline effort and reduce costs.
  • The risk of fines and outside state intervention is mitigated: Many governments are bringing forward regulations to protect the environment and integrate sustainability into businesses. Those organaations that have already adopted the ESG approaches are better placed to avoid the risk of what may be significant regulatory penalties for non-compliance.
  • The likelihood of negative externalities is reduced: Governments may well intervene to prevent societal costs derived from damage in the three areas of environmental, social or governance by imposing tax burdens on the ‘polluters’. Stronger regulation of ESG issues by governments will seek to mitigate the effects of negative externalities, including that of any perceived to damage society. The Swiss Re Institute estimated in 2021 that global environmental damage could cost $23 trillion by 2050, significantly impacting capital markets and global economic growth.  Governments will not be able to stand idly by and ignore this cost. They will seek to retrieve some of these costs, both financial and reputational, through business taxation.
  • Internal innovation is strengthened: Switching to more sustainable business practices provides an opportunity – indeed, an environment – for new and innovative ideas to grow. It is a chance to seriously and productively ask questions about the way in which the organisation is operating.
  • Environmental and supply risk scenarios are improved: Energy security has of late risen high on the agendas of both countries and companies. Investing in more renewable resources such as wind, water and solar power can certainly provide a much higher level of security over energy resourcing. This will positively impact a range of risk situations for many companies. This will positively impact a range of risk situations for many companies, and, of course, stand the business in a much better place to meet ever more challenging environmental regulations in a timely and effective way.
  • Recruitment and retention benefit: There is growing evidence worldwide that organizations with a strong reputation for their ESG capability and for corporate social responsibility find it easier both to recruit and retain a talented workforce. Surveys have shown that up to 70% of employees are influenced in their decision to stay in a company for a longer term by its strong sustainability program, and nearly 40% had chosen a job in the past because of the company’s sustainability performance.
  • A broader and more loyal customer base can develop: Evidence is growing that sustainable businesses see greater financial gains than their unsustainable peers. Customer motivation to deal with sustainable brands is also growing.
  • Opportunities for positive publicity abound: Positive publicity is very likely to follow when organizations opt for sustainability, especially if this marks a turning point for the organization. This may in turn positively affect employee pride, increase applications from sustainably-minded job candidates, enhance customer loyalty, and accelerate personal business referrals. This resultant improvement in the brand image can be substantial.
  • Differentiation and reputation are enhanced: ESG-sensitive and sustainable business practices may well offer a chance for a business to stand out and gain a competitive advantage. Furthermore, when businesses raise their standards in terms of the ESG criteria they greatly minimise the likelihood of reputational damage stemming from unethical practices that may lead to environmental damage or the mistreatment of employees, for example.

As is evident just from this short list of benefits, there is great gain to be found in implementing a strong and strategic ESG agenda within an organisation. In drawing these points into a conclusion, it is worth just mentioning five
practical pointers regarding the process of setting this agenda:

1. An off-the-shelf ESG package will not work. Every company, business, or organisation has unique goals, a different culture, and a varying business environment to operate within. Off-the-shelf will not suffice, and will certainly not have anything like the desired beneficial impact outlined in the points above.

2. The process of establishing the ESG agenda and strategy should involve as many from the organisation and its wider stakeholders as possible, if it is to truly be representative of the real company. The iceberg of ignorance first popularised in the late 1980s rightly pointed out that management only tend to see the very tip of any iceberg issues affecting their businesses.

3. The ESG factors need to be integrated into every element of the organisation. They cannot remain the vision of the CEO, the language just of the senior company executives, or even that of employees alone. It must reach out into the ever-widening range of stakeholders who either influence or are influenced by the organisation.

4. The plan must be linked with the KPIs that operate throughout the organisation. Peter Drucker’s well-known adage ‘what gets measured gets managed…’ surely holds true here. If the plan is not backed up with daily, weekly and monthly targets it will have little or no impact.

5. Monitoring the plan, often, is the lubricant to success. All of us know that without the regular monitoring and noting of issues both positive and negative, little will be achieved, and the plan will become an annual embarrassment only to be held up in performance reviews. Monitoring, and appropriate practical responses to the outcomes of that monitoring, are what truly bring an ESG strategic plan into real fulfilment.