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 / Investment, growth, talent: how ESG can benefit your business

Investment, growth, talent: how ESG can benefit your business

15 Nov 2021

|10 minutes

Environmental, Social, and Governance (ESG) explained.

What is ESG and why should businesses care about it?

Environmental, Social, and Governance (ESG) – or sustainability – has developed in importance at an exponential rate over the last decade for investors, consumers and business leaders alike. The concept relates to the actions taken by an organisation in relation to the three key pillars with those actions now reportable to a number of agencies for many large businesses. From an environmental standpoint the company must demonstrate how it performs on and contributes to environmental concerns such as waste management, carbon emissions and energy efficiency. Social factors include its response to gender and diversity issues, human rights and community relations. Finally, Governance criteria assesses the standard to which the company is run. So, where did ESG come from and why should companies care about it?

ESG and the race to decarbonisation

If ESG wasn’t a priority for businesses before 2019 it certainly should have been since. This was the year the UK government announced that - in line with recommendations made by the Climate Change Committee - it had committed the UK to achieving net-zero emissions by 2050. Since then, large companies have come under pressure from reporting bodies, legislation and mandates to cut emissions and demonstrate transparency through the implementation of effective ESG strategies. They also now face scrutiny by socially responsible investors and consumers who are making ethical choices about who they purchase from.

ESG standards, transparency and mandatory reports

Organisations like the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-related Financial Disclosures (TCFD), and the Global Reporting Initiative have been created to reduce the complexity faced by companies in the disclosure of their ESG performance. Transparency, clarity, guidance and standards are needed for accurate and easy corporate sustainability reporting and each of these agencies support businesses worldwide across those four elements.

SASB was founded in 2011 as a non-profit organisation and has since developed a set of 77 sustainability accounting standards that facilitate the communication between a company and its investors. Likewise, the TCFD’s objective was to develop a set of recommendations for easier disclosure to encourage more reliable climate-related financial information for investors and allow companies to spotlight the risks and opportunities brought about by climate change to enable more intelligent and accurate forecasting and planning. Aligned with the previous two institutions is the GRI whose structure for ESG reporting enables companies to share their sustainability performance within a comparable framework.

Despite this support there are just two energy assessment reports that large UK organisations who meet a certain set of criteria are mandated to comply with (although more are anticipated as climate change issues intensify): the Streamlined Energy and Carbon Reporting (SECR) policy and the Energy Savings Opportunity Scheme (ESOS). SECR was implemented on 1 April 2019 to encourage companies to increase their energy efficiency and reduce carbon emissions by including in their annual reports: energy use, greenhouse gas emissions, at least one intensity metric for the current and previous financial years, and any energy efficiency actions. ESOS requires large organisations to report their energy usage every 4 years and identify new ways they could save energy. The next compliance date for ESOS is December 2023.

ESG and investor confidence

Investors are using ESG ratings more and more as a key influencer in their investment decisions and often require access to company ESG performance as well as financial. Projects designed to combat the effects of climate change and support sustainability initiatives are becoming increasingly attractive as investment opportunities.

Having a robust ESG policy isn’t mandatory but it’s certainly shifted from a ‘nice to have’ to an ‘expected to have’ in terms of reputation, stakeholder interest, credibility, and competitive advantage. Evidence exists to suggest that companies with an ESG policy and a proven commitment to its implementation perform better over the long term and enjoy benefits across all three pillars.

A company that has proven and reportable sustainable practices will attract investors and interest from ethical consumers. Also, improved energy efficiency and reduced usage across all operations will deliver a cost saving gain. Plus, an enhanced reputation achieved from a real and demonstrable commitment to ESG will help to attract talent. A large proportion of the younger workforce are making decisions about who they want to work for based not only on salary and benefits, but how seriously an organisation takes its environmental and social commitments.

If you haven’t yet developed and ESG policy, perhaps it’s time to get started.

Find out more

You can find out more about Shell’s Environmental, Social and Governance policy here.

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