Increasingly, customers aren’t content to simply do business with an organization. They want to understand the organizations they interact with, and they want to know they are supporting companies that act responsibly. At the same time, stakeholders and employees have even greater accountability in ensuring that the groups they align themselves with behave ethically and sustainably. To promote transparency and positive business practices, businesses across nearly every industry are embracing environmental, social, and governance (ESG) standards and frameworks.
What are ESG standards?
ESG criteria measure the ethical impact and overall sustainability of an organization. Socially- and environmentally-conscious stakeholders consider these standards when evaluating a potential investment opportunity. But while ESG began as a collection of investment metrics, it has grown into a valuable reference for customers and employees who are committed to doing business with socially responsible companies.
In short, ESG is a major priority among stakeholders at all levels, who expect the companies to do business in an ethical and sustainable manner.
In response to the increasing demand for social responsibility, ESG standards have become a vital tool to measure business performance as well as sustainability. Stakeholders rely on the transparency of ESG reports to evaluate organizations based on relevant social, environmental, and governance factors. Additionally, regulatory agencies may use ESG criteria and reports to evaluate how well specific organizations are conforming to set standards related to energy use, waste production, natural-resource conservation, data security and privacy, emissions, animal treatment, and human rights. And because ESG compliance helps mitigate risk, organizations that adopt ESG frameworks are more likely to be successful in the long run.
How did ESG come to be and where is it going?
Although corporate ESG programs have seen a recent surge in popularity, the term and the ideals that support it have been around for quite some time.
History of ESG: from conception to implementation
ESG can trace much of its support to the Socially Responsible Investment (SRI) movement, which predates modern ESG by several decades. The term Environmental, Social, and Governance itself was first coined in Who Cares Wins, a 2005 report from the International Finance Corporation. The United Nations adopted and further popularized ESG in its Principles for Responsible Investment (PRI) report in 2006, which established ESG criteria for financially evaluating companies.
At the time, 63 investment companies accounting for $6.5 trillion in assets under management (AUM) agreed to incorporate ESG criteria in their investing strategies. Global ESG assets are expected to surpass $41 trillion in 2022 and reach $50 trillion in 2025—accounting for approximately one-third of all AUM.
Future of ESG: from good to better
As the consequences of unsustainable business practices become ever more apparent, ESG is poised to become an even more important factor for stakeholders. At the same time, improving technology—particularly in the realm of data collection and real-time analytics—will make it easier for stakeholders to employ ESG criteria in their decision-making.
ESG is a major priority among stakeholders at all levels, who expect the companies to do business in an ethical and sustainable manner.
In the future, as direct indexing allows stakeholders to exert even more control over how their investment funds are used, ESG may take on much greater significance. Organizations that don’t meet ESG expectations may find themselves lacking vital investment capital.
How do you make an impact with ESG standards?
Simply put, companies of all kinds are discovering that environmental, social, and governance policies play an essential role in their success. So how can your organization leverage ESG standards to make a positive impact on the world while also meeting financial goals?
Net-zero is the term that describes the goal of negating the amount of greenhouse gas (GHG) emissions created by human activity, effectively achieving balance between the emissions produced and those that are eliminated from the atmosphere.
Committing to becoming a net-zero company means understanding how your organization currently contributes to GHG emissions within the three scope classifications:
- Scope 1: Direct emissions such as those produced by your facilities and vehicles
- Scope 2: Indirect emissions created by activities such as purchasing and using electricity
- Scope 3: Emissions along your extended supply chain
This approach also includes setting long-term goals that are in line with net-zero objectives and your business’s mission, identifying relevant programs and technologies to assist in the process, and clearly measuring and reporting on the progress and benefits of your net-zero projects.
The transition to net-zero can be a difficult one, but the advantages go beyond sustainability. Net-zero companies are more likely to attract investment interest, reduce reliance on nonrenewable energy grids, improve brand reputation, and increase profitability by reducing operational costs and optimizing core processes.
ESG sometimes gets oversimplified as corporate policies relating to environmental sustainability, but the social aspect of ESG is just as important. Diversity programs can help businesses develop a more inclusive workforce. This results in a broader range of perspectives and skills, which has been shown to result in improved reputation and talent acquisition, along with increased profits and productivity.
With such a robust business case for diversity, many companies are embracing workforce policies based on diversity, equity, and inclusion (DEI). By applying DEI principles, organizations take steps to ensure that people from all backgrounds have equal opportunities for hiring and advancement.
Given the increasingly digital world in which we all live, it’s impossible to evaluate risk without discussing data security. Even before the pandemic forced much of the world to rely on digital channels for communication, entertainment, shopping, etc., data governance was already playing an important role in investment evaluation. Today, companies in every industry house massive volumes of customer and business data. Businesses that fail to protect their data face loss of customer trust and possible liability for damages suffered, along with fines and other consequences related to regulatory non-compliance.
The G in ESG stands for governance—how a company is managed. This encompasses all decisions related to how the company attends to the needs of stakeholders, including how data is managed and secured. Establishing effective data-security standards protects all stakeholders and demonstrates that your organization is serious about mitigating data security risk.
How do you measure success with an ESG framework?
Every business is different. As such, every business will need to establish its own ESG strategy that addresses the needs of all stakeholders, identifies potential challenges, establishes timelines, determines value compared to effort, and defines success metrics. To do this, companies rely on ESG frameworks.
ESG frameworks are formal standards that allow organizations to measure and report on their ESG performance. In most cases, ESG frameworks are voluntary; a business may choose whether to adopt a given ESG framework to help them understand and evaluate their ESG performance. Occasionally, certain stakeholders or governmental regulatory bodies may require that an organization adopt a specific ESG framework.
Just as business ESG strategies vary widely in terms of focus, goals, and initiatives, ESG frameworks offer a range of different standards and associated metrics. While some businesses develop their own ESG frameworks, the current variety of trusted off-the-shelf frameworks makes it easy to find an option that fits your business needs.
ServiceNow ESG solutions
Learn how ServiceNow can help elevate your environmental, social, and governance (ESG) program with simple data collection, on-demand progress monitoring, and automated reporting.