Environment, Social, and Governance — A Path to Business Success
Environmental, Social, and (corporate) Governance (ESG) is now a catchphrase in the business community. The environmental component includes the resources a company uses and its carbon emission and waste. For a company to operate, it consumes energy and resources and therefore affects the environment. Likewise, environmental conditions affect the company as well.
The social component pertains to how a company behaves and the subsequent perception people have of the firm. The social aspect also encompasses diversity and labor matters. The (corporate) governance component refers to the inner workings of a company, its policies, and its procedures. This component also includes how the company adheres to regulations and addresses the requirements of external company partners.
All of these elements are interconnected. For example, a company’s governance policies dictate its social and environmental actions. The current sentiment is for companies to have a proactive ESG stance. Due to climate change, customers, suppliers, shareholders, and employees want companies to adhere to sustainable practices. Investors have the same sentiments, as demonstrated by their investments.
As of the end of 2019, worldwide sustainable investments stood at over $30 trillion, 10 times greater than 2014 figures. The size of this investment indicates that ESG is not just a feel-good slogan but a requirement to attract investors. While external pressures influence companies to embark upon ESG projects, a well-executed ESG project can lead to a better performing and more successful company.
Companies with good ESG practices tend to recruit and retain top-notch employees, cultivate a sense of purpose that improves employee motivation, and raise productivity across the company. On the opposite end, poor ESG practices can lead to discontentment and conflict that can hurt productivity.
A company with a favorable image due to its ESC practices often has better opportunities to broaden its existing markets and enter new ones. Approving government agencies tend to award licenses and permissions to these companies, providing them with an avenue for growth. For example, a mining company with outreach programs and activities beneficial to the community likely will have a better chance of winning mining rights than a company with little social empathy.
ESG also can lead to significant cost savings. Companies with environmentally sustainable initiatives endeavor to lower electricity, water, and heating expense. This often leads to lower operating expenses and higher profits.
A good ESG program can improve investment returns by earmarking capital expenditures to more sustainable outcomes such as waste minimization projects. Firms can also avoid investments that may not be viable due to longer-term environmental concerns. Also, deciding to continue using plants and equipment that consume a huge amount of energy can result in considerable cash outflow. While investing in new assets to modernize operations may be hefty, a firm may avoid regulatory reactions to emissions that impact energy expenses.
Lastly, a company with good ESG practices is less likely to face government intervention. ESG practices can bring about government support instead of an adversarial relationship. Large firms are investing in carbon capture, decarbonization, and storage works in the oil and gas industry.
A group of energy companies in the US has also established the Oil and Gas Climate Initiative to hasten industry action to climate change using mainly advocacy and innovative technology investments.
