What is Environmental, Social, and Governance (ESG)?

ESG is a set of standards investors may use to screen and evaluate potential investments, using environmental, social, and governance factors.

Environmental, social, and governance are three of the central factors in measuring the sustainability, ethics, and social impact of a company. ESG factors aren’t necessarily financial, but they still play a significant role in the long-term risk of a company and their ROI. Simply put, companies that incorporate ESG factors are less risky and more likely to succeed.

Environmental

As the realities of climate change and other potentially world-altering ecological issues become ever-more documented, a business’ commitment to sustainability becomes more important. Environmental factors in ESG refer the impact that an organization may be having on waste, pollution, resource depletion, greenhouse gas emission, climate change, and deforestation.

Social

A company is more than its products, services, or logo; it’s a collection of people working towards common goals. As such, how well a company treats its employees, and whether it complies with established health, safety, and hiring standards can help investors evaluate its overall quality and risk. The social factor of ESG incorporates employee relations, local communities, health, safety, conflict, and diversity.

Governance

At the heart of ESG is the idea that businesses need to take responsibility for the kind of impact they create. Governance is an essential factor in this, examining how well an organization governs itself. Governance focuses on issues such as executive remuneration, donations, political lobbying, tax strategy, board diversity, structure, corruption, and bribery. Proper governance helps align issues between stakeholders at different levels, support continued growth and long-term strategy.

Environmental Social Governance

The United Nations’ Sustainable Development Goals are 15 goals outlined by the United Nations Member States, which provides a series of objectives designed to help create peace and prosperity for the people of the planet. No matter the size of the business and regardless of the industry, all companies can contribute to SDGs.

When businesses do business responsibly and pursue opportunities to solve societal challenges, they can deliver solutions for issues ranging from the climate crisis to poverty, inequality, and starvation. Such innovation from the private sector is a growing market, and the benefits for consumers and the planet are immeasurable when a company chooses to behave responsibly and promote positive environmental and social practices.

Why is ESG good for business?

A 2019 survey of over 1,000 CEOs from around the world by the UN Global Compact found that 87% “believe the SDGs provide an opportunity to rethink approaches to sustainable value creation.” 70% of those CEOs “see the SDGs providing a clear framework to structure sustainability efforts.”

ESG can be both an investment philosophy and a series of core values. Companies that are sustainable tend to be builders of both profit and society, as ESG is an investment in responsible growth.

A new view of ESG criteria

From an investor’s standpoint, the most obvious downside to ESG would be that it seems to pose limitations on which companies could be invested in, thus also limiting an investor’s potential profit. Not long ago, non-ESG investors had a wider selection of investment opportunities, and often saw much greater returns investing in businesses that could operate unhampered by environmental, social, or governance self-scrutiny.

But the tide is beginning to turn, and the pros for adherence to ESG criteria are becoming more apparent. Outside of the practical and ethical concerns, ESG criteria may help companies avoid risk factors or reputational damages that arise because of practices that fall outside of practical ESG criteria. For example, organizations that adhere to ESG social standards are less likely to become embroiled in scandals associated with unethical hiring or management processes. Companies that shift their focus toward ESG-minded practices can gain more traction, as investment firms are beginning to see ESG as an indication of low-risk.

ESG investing is on the rise

In the years to come, there are clear indications that companies will begin to face increased scrutiny from governments, customers, and investors; those that do not promote ESG standards will likely face penalties—not only in terms of government-regulation, but also in regards to rejection from consumers and investors. In other words, as public and governmental values shift to place greater emphasis on sustainability and social accountability in business, ESG is becoming increasingly relevant across all industries.

ESG investing reduces risks

It’s worth noting that there are two different categories of risk to consider when discussing ESG: the direct risk (climate change and other environmental considerations) and indirect risk (brand reputation, investor loyalty, etc.). With that in mind, the primary investing risks for each ESG factor are as follows:

Environmental

Climate change and other environmental issues are growing. And if these issues are not addressed on a global scale soon, we may witness serious ramifications for governments, economies, and even individually operated businesses. Organizations that make the effort to be environmentally responsible may be better able to weather these challenges, offering investors increased stability.

Social

It’s no secret that happy, satisfied, engaged employees contribute to increased business success. The reverse is also true: Unhappy employees are much more likely to underperform, hurting the business’ bottom line. But employee satisfaction goes beyond the cubicle. Businesses that follow high standards in how they treat and support their employees will have an easier time keeping top talent, and those employees will be more likely to become brand ambassadors, even when they aren’t on the clock. Taken altogether, this makes these companies a lower risk investment.

Governance

Governance details the inner working of the business itself. High standards of governance help ensure that the business in question is not involved in any illegal practices—an obvious red flag for investors. But more than that, governance promotes accurate and transparent financial processes. It assigned rights to stockholders. It helps eliminate the risks associated with conflicts of interest. Essentially, it exists to ensure ethical practices at all levels, protecting the business and those who invest in it from penalties and risks associated with poor management.

An important thing to remember is that ESG isn't a separate, independent, niche problem; it has fundamental effects on your approach to doing business (i.e., building products to be recycled, designing processes so they can be monitored for compliance with internal and external goals, etc.). Together, these are helping create frameworks for effectively approaching these issues using a system composed of people, processes, and tech working together to help companies effectively incorporate ESG as an essential component of their overall strategy, risk, and governance programs. And this means reduced risk for investors.

ServiceNow understands that creating a more equitable, ethical, and sustainable world is a responsibility everyone shares. With this as a driving focus, ServiceNow is dedicated to helping employees, customers, and communities change the world for the better. We want to not only make a positive impact; we want to help others make a positive impact as well.

And our dedication is more than just lip service. ServiceNow supports employees in giving their time, talent, and resources. Through employee donations backed by ServiceNow matching, we’ve generated more than $5 million in positive social impact, and supported over 2,500 charitable causes.

ServiceNow is also reassessing environmental impact, and finding ways to prioritize clean energy and reduce carbon intensity and overall emissions. With this goal, we’ve created sustainable supply chains, developed a working process for reusing and recycling retired corporate IT and data center equipment, and always prioritize LEED certified (or local equivalent) building in all of our leased office space.

And, because improving the world takes more than just donations and sustainability, ServiceNow is also dedicated to improving and empowering individuals. Our digital literacy programs are giving tomorrow’s digital workforce the skills and resources they need to thrive, and to keep making positive change for decades to come.

Learn more about ServiceNow and ESG, and let’s work together to do the right thing.

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