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Is ESG Fading Away?

We’ve been asked a handful of times “are you seeing interest in ESG fading away?”

The answer is simple: No.

Reporting on Environmental, Social, and Governance (ESG) considerations has accelerated rapidly over the last few years.  What started as a way to communicate a company’s Corporate Social Responsibility initiatives expanded into a mainstream approach of investor decision-making as companies received increased pressure to report on their ESG initiatives and deliver a holistic picture of what was influencing their financial dynamics.

Recent conversations about the politization of ESG and the debate around whether these initiatives provide any meaningful data or financial return has individuals questioning its validity.  What these discussions lack is the recognition that ESG is a crucial element of sound business management, rather than an isolated initiative. It is simply an acronym for new and traditional business practices and key performance indicators, similar to a balanced scorecard.

Here are four key factors driving ESG as a valuable tool in corporate decision-making:

  1. Risk Management – Examining your comprehensive business strategy from the lens of ESG broadens the perspective on potential risk indicators that may impact a company’s financial performance.  This holistic approach allows for a more thorough assessment, uncovering insights into potential challenges that may otherwise be overlooked. By integrating ESG considerations into strategic planning, businesses can enhance their ability to identify and mitigate risks, ensuring a more resilient and sustainable financial performance in the long run.

  2. Regulatory Response – Regulatory authorities across the globe are working to create more thorough and uniform frameworks for evaluating ESG factors. Global initiatives such as the EU’s Corporate Responsibility Reporting Directive (CSRD), the establishment of the International Sustainability Standards Board (ISSB), along with its consolidation of the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial disclosures (TCFD), have set the stage for greater ESG transparency. In the U.S., the SEC has been working on rules that would mandate climate risk disclosures, while rules over reporting on human capital and cybersecurity (also both ESG topics) have already been adopted.  Companies who currently monitor and assess their ESG initiatives will be strategically positioned to align with future regulatory requirements.

  3. Stakeholder Expectations – Organizations that assess and disclose their ESG performance are poised to fulfill the expectations of diverse stakeholders more effectively – including investors, customers, business partners, and employees. Each of these stakeholders seek enhanced transparency into the operational and business practices of the companies they invest in, purchase from, collaborate with, and work for.

  4. Long-Term Value Creation – The issues encompassed by ESG directly affect the performance and profitability of organizations over the long term. They influence a company’s capacity to attract investors, secure capital, recruit new talent, retain employees, and foster public trust and credibility.

 

Far from being a passing trend, ESG considerations have evolved from a mere communication tool for Corporate Social Responsibility to a mainstream driver of investor decision-making. The recent debates surrounding the politicization and the perceived lack of financial return on ESG initiatives may have raised questions about its validity, but it is essential to recognize that the concept of ESG is integral to sound and long-lasting business management, regardless of how the language changes over time.