Your ESG rating is similar in practice to your credit score, ratings agencies will track various data points and assign businesses an ESG rating, many ratings agencies and investment funds are starting to include ESG ratings in their total credit score, as generally a high ESG is a good indicator that a company will provide value over a long term period whereas a low ESG can often signify risk.
ESG factors are rapidly becoming more mainstream, and it’s likely that in the wake of the COP26 summit we will see an increase in environmental regulation and a greater focus on sustainability in business. By adopting and refining these practices now you’ll be ahead of regulation and in a position to scale them with your company as you grow.
The general rule is that the smaller a company the easier it is to incorporate ESG into their overall business, a small company has less to track, has a smaller footprint and can be more adaptable in a quickly changing world.
Start by measuring environmental data, energy, water and waste if you don’t already. Once you have these metrics you can start to think of ways to reduce usage, this is not only a great example of how your company is now environmentally focused and driven that you can use for marketing but also an effective cost saving exercise.
The social aspect of ESG is most obvious when it fails, we have all heard about companies with abhorrent working conditions, sweatshop labour and a history of human rights violations, don’t do that. Not only is it immoral but the negative press that leads from these practices can stain a company’s reputation for decades.
Instead you can make your company a beacon of progressive values, show that you care about your employees by taking care of them, and ensure you have fair working conditions. Employ effective sustainability, ethics and discrimination policies. Work with suppliers and businesses that support your company’s values, show your commitment to improving the society you operate in by donating a portion of your profits to a good cause. This will build a foundation of trust between you, your employees and your customers. Having an attractive corporate culture will help you gain and retain the best employees and help keep your workforce motivated and productive.
The governance aspect is focused on transparency and ethical practices, you’ll be judged on the diversity and structure of your board, your tax strategy, how much your executives and directors get paid, and how you go about protecting your shareholders interests, and of course your willingness to publicly disclose this information.
This section is more relevant to large businesses, which are less likely to disclose information publicly and have more elaborate corporate structures. The golden rule here is accountability and transparency, a business that’s transparent and accountable in its dealings is much more attractive to investors and allows shareholders to feel more secure than one that refuses to release such information.
What to do next?
Once you’ve taken into consideration each aspect of ESG and how it applies to you, you should now have an idea of what you’re good at, and where you can improve. Publish a sustainability report, detailing your findings, where you perform well, and, where you could improve and what you plan to do in order to improve over a marked period of time. I would recommend 6-12 months, at the end of that period, repeat the process, review how successful your plans actually were and adjust as needed. Make it an Annual or Bi Annual Report. This sustainability report will help inform any ESG rating and is a powerful marketing tool, it shows clearly that you are invested in the future and allows you to proudly display your achievements.