Environmental, Social and Governance (ESG) and implications

The world is faced with a myriad of issues, and at the top of the list is the issue of climate change. Companies in Nigeria, Africa and globally engage in business with the sole aim of profiting. But very recently, several companies have gained knowledge of the varying impacts of their activities on society, the planet, and the smooth operation of their businesses. One major impact of a company’s operations is environmental concerns, with corporations accounting for the majority of global carbon emissions.

With a desire by companies to engage in business while also averting their activities that destroy the environment and the society, companies have adopted the environmental, social, and governance (ESG) technique to help improve their efficiency. To this end, accountants, lawyers, financial advisers, and many professionals working with corporations have sought to adapt their businesses to assist companies in achieving their ESG goals.

This article investigates ESG development and how companies have leveraged it to foster profit and community growth.

ESG parameters and their development for business

The influence of ESG on mainstream business cannot be overemphasized in today’s economy. The demand for ESG was sought by society, rights activists, customers, and employees. The need for a responsible organization has increased pressure on corporations to harness and invest in the environment, the social development of companies’ employees and society, and the implementation of best practices, equality, and fairness in their dealings. ESG entails a company’s action to advance a more positive world, free from discrimination, and negativity, and an overall responsible culture in society.

ESG innovation comes as an instrument used by corporations to encourage the advancement, development, and sustainability of positivism at the workplace and in the communities where the company is established. Examples of ESG include climate change support, workplace standards, and so on. Below are the three ESG tools and the parameters to which they refer.

Environmental

The world is aware of climate change, which is primarily caused by the environmental impact of large corporations around the world. With excessive floods in some parts of the planet and drying glaciers in others, the world’s governments have increasingly become concerned about the advancement of the environment for continued sustainability.

In the past, when corporations made products, they often used environmentally unfriendly items that eventually affected the planet. For instance, since plastics and tin are non-biodegradable and environmentally unfriendly items, using them in production will significantly contribute to the depletion of the environment. 

The environmental element in ESG aims to encourage companies to use environmentally friendly products while also encouraging reuse and recycling. Companies also invest heavily in green bonds and take all steps possible to reduce carbon emissions.

Social

The social element of ESG aims to meet the needs of people. The demand to be a people-friendly company is significant for being a successful company in today’s society, with corporations spending millions on human resources and customer relations to drive this goal.

A people-friendly company is concerned about how its customers, employees, and even members of the general public are treated by the management and the overall company. Employees’ living standards, including a suitable salary structure and stable bonus benefits, are a  few examples of social element actions under the ESG.

The society also plays an important role in the social element; for example, most corporations have refused to press charges in court due to their reputation in society; they would rather settle or adopt the alternative dispute resolution options.

Governance

The governance element in the ESG style identifies with the way the corporation is managed. This relates to board composition, board powers, shareholder powers and rights, the relationship structure of the board with the shareholders, fairness among the directors, and the relationship between the company and other stakeholders, including creditors, auditors, and others.

Governance aims to control the power of the company by allowing for the sharing of these powers and also providing a means to checkmate these powers by other players in the company. An effective governance structure would see the company reduce extortion and unnecessary litigation, increase cordial relationships among the directors, and the overall success of the company in general. A proper governance structure would also place the company in the best image publicly.

Advantages of ESG to corporations

1. It reduces cost: Having costs reduced drastically is a major benefit of ESG. Research has shown that having an effective ESG framework in place saves costs in production. Employees who are happy working in an organization, for example, are more likely to be productive doing work for the corporation in the end.

2. Increases productivity: This acts as an offshoot of the former; when ESG is implemented by a company, it fosters the best productivity among the employees and the general management of the company. A company that adopts the best ESG practices by accepting all views of employees will, in the end, see the employees be themselves and become more productive.

3. Facilitates growth: A proper ESG action allows for a stronger corporation, which facilitates growth in the business. This is primarily caused by the way society views the corporation and would ordinarily want to do business with them rather than with an association that has negative impact to the environment, has no social concerns, and has a poor management structure.

4. Optimizing investment: Perhaps the most significant of all the advantages is optimizing investment. When company management is caught up in corporate fraud and other corrupt practices, a standard corporate governance structure can help a company rein in this excess.

Conclusion

ESG has been on a trend that is expected to increase in the coming years with continued improvement. Following public pressure on all companies to adopt the structure, legislation by nations could have an impact to its overall adherence. 

One thing is clear, though: the ESG tool is increasing in popularity among responsible corporations with a deeper understanding of what society, the environment, and employees demand from the company.

Is ESG regulated? Not really; there are no regulations making ESG practices compulsory. Nonetheless, the influence of society on the company’s actions can impact the adoption of ESG.