As the mantra to “make the world a better place” echoes throughout society, civic-minded groups, conservationists and organizations have led the charge to elevate efforts surrounding the environment and culture.
Of particular significance are the effects being felt in the business world, as companies are held to higher standards and required to take action that reflects their commitment to society over profit.
Initially, many companies answered the call by establishing corporate social responsibility programs, but a more robust and measurable approach became necessary to quantify actions. This led to the formation of environmental, social and governance practices and ESG scores for companies.
Savvy business leaders understand the correlation between ESG scores and business success. Four areas for leaders to consider include:
ESG score basics. ESG scores determine how companies are managing their business from an environmental, social and governance perspective, which can be an indication of leadership abilities, future risks and the long-term success of a company. Scores are compiled by third-party providers that can vary due to different methodologies, metrics, data and weightings.
Business leaders typically work with their leadership teams to identify the most-relevant ESG areas or mix for their business. Human resources collaborates with appropriate team members from designated areas to develop and implement best practices that focus on ESG actions and measurement methods for external reporting. ESG scores help businesses evaluate themselves on societal efforts, and they can be a deciding factor for top talent, customers and investors.
ESG action areas. Companies with ESG practices in place realize the importance of improving their programs to make a greater impact on societal issues and increase ESG scores. Leaders should understand the numerous action areas within the three categories that can have a significant impact.
For example, environmental includes carbon footprints, electronic waste, green building and renewable energy; social involves worker training, labor management, health and safety protocols, and community relations; and governance includes diverse leadership and board compositions, business ethics, accounting practices and compensation standards. There are various ways companies can improve their programs and raise their scores.
Talent pipeline. Maintaining a talent pipeline has never been more challenging for employers. However, companies with high ESG scores can have a competitive advantage. As workers continue to voice their opinions about being aligned with companies that support their values and belief systems, businesses that implement and promote ESG actions and scores will attract more qualified candidates and increase retention.
When employees know their contributions are having a positive impact in the world, they feel more fulfilled and satisfied.
Financial aspects. Effective ESG practices that lead to high scores can have a significant impact on top-line revenues and bottom-line net profits. Many consumers want to be aligned with companies that are socially and environmentally responsible, so they are loyal to those with strong ESG practices and scores, which can lead to greater market share and increased top-line growth.
In addition, companies that address sustainability by implementing initiatives that increase efficiencies, affect performance and alter materials or processes should experience a reduction in overall costs. When investors are evaluating companies, they not only look at financials, but they also take ESG scores into consideration.
When business leaders make ESG practices and scores a high priority, they are positioning their companies for long-term success by appealing to job seekers, employees, consumers and investors who value companies that address societal issues.
Eric Cormier is a manager of human resources services in Rhode Island for Texas-based Insperity Inc., which provides human resources and administrative services.
