What is ESG and why does it matter?

A foundation to navigate risks and opportunities presented by an increasingly complex world

McKinsey’s definition of ESG:

The E in ESG, environmental criteria, includes the energy your company takes in and the waste it discharges, the resources it needs, and the consequences for living beings as a result. E encompasses carbon emissions and climate change. Every company uses energy and resources; every company affects, and is affected by, the environment.

S, social criteria, addresses the relationships your company has and the reputation it fosters with people and institutions in the communities where you do business. S includes labor relations and diversity and inclusion. Every company operates within a broader, diverse society.

G, governance, is the internal system of practices, controls, and procedures your company adopts to govern itself, make effective decisions, comply with the law, and meet the needs of external stakeholders. Every company, which is itself a legal creation, requires governance.

ESG offers a foundation for navigating the risks and opportunities presented by our increasingly complex world:

• “E” – Environment.  When making business decisions, potential investors and customers look at the ability of companies to reduce their greenhouse gas (GHG) emissions, and to mitigate the cost impacts of climate change. Companies are increasingly asked what they are doing to not only reduce their impact on the environment, and also to make it better.  
• “S” – Social. Facilities associated with many operations are not always popular, but they are essential for the health and safety of all communities.  Operations contribute to the well-being of local communities by employing local residents and contributing to community and economic vitality.

Social criteria to consider:

• Are we good employers?  Are we treating our employees fairly, and do we have the right programs in place to ensure commitments to inclusion and diversity within our companies and as part of our greater communities? 
• Do we protect and reflect the faces of our communities? Are we good community partners? Are we listening to and learning from those we serve?
• “G” – Governance.  Stakeholders look to organizational leaders, corporate structure and culture, and the processes companies have thoughtfully established.  An equitable governance foundation based on transparent policies benefits all stakeholders. The current spotlight on racial and gender diversity is prompting a call for greater diversity in the makeup of corporate boards and executive leadership, as well as inclusive hiring, recruiting and development practices.  

In August of 2019, The Business Roundtable (BR), an organization made up of almost 200 corporate CEOs, adopted a new Statement on the Purpose of the Corporation. For 40 years, the BR endorsed principles of shareholder primacy – that corporations exist principally to serve shareholders.  BR’s 2019 announcement outlined a new standard for corporate responsibility, committing CEOs to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders. 

Recent studies suggest companies with higher ESG scores tend to outperform peers (Oppenheimer Equity Research 6.2.2020). Companies that are well run – from top to bottom – do better (G). Taking care of employees fosters loyalty and a commitment to success. Community partnerships create mutually supportive investments in future success (S). And caring for the environment mitigates risks and costs associated with climate change (E).