In today’s social climate, consumers expect more from corporations than just quality products or services. Whether they’re purchasing household items for their families or SAAS products for their employer, buyers are looking beyond the product to determine what kind of impact companies have on the world at large.
This shift in buying behavior has given companies incentive to make institutional changes to how they operate. Enter: ESG.
Environmental, social, and governance standards provide companies with a framework for developing more sustainable business practices. And when I say sustainable, I don’t just mean switching to solar energy or greener packaging. Sustainability also refers to a company’s longevity. How are you positioned to adapt to changing demand? A changing economy? A changing environment? ESG seeks to understand just that.
For many B2B companies, ESG isn’t a concept they can ignore. Investors and key stakeholders are increasingly interested in ESG, with entire agencies now devoted to grading organizations’ compliance.
Ready to add yet another business acronym to your vocabulary? Let’s dive into the meaning of ESG and how this impacts your B2B company.
What is ESG?
ESG stands for environmental, social, and governance. This term refers to how a company manages their operations related to sustainable and ethical practices. Now, let’s take a closer look at each element of ESG.
When you think of an environmentalist, you probably don’t picture a corporate executive in a pantsuit. But ESG asks us to combine two worlds, finding balance between sustainable practices and economic prosperity.
The “E” in ESG focuses on how a company impacts the environment. Under this umbrella, you might evaluate an organization’s greenhouse gas emissions, stewardship over natural resources, and energy consumption. Conservation of the environment isn’t just idealism in the ESG framework–it’s considered risk management.
Onto the “S” in ESG. This pillar addresses social impact. It aims to evaluate how a company interacts with stakeholders, including employees, customers, and the communities in which it operates. Internally, this may include human capital management metrics, diversity and inclusion initiatives, and customer satisfaction.
While internal operations are a huge consideration, ESG also asks companies to look beyond their own workforce to other key parts of their business, including ethical supply chain management.
Governance refers to how a company polices itself to maintain transparency, accountability, and ethical operations. Companies are expected to have clear policies in place to manage growth initiatives in a fair and sustainable way.
When examining governance, you may evaluate the makeup of company leadership, executive compensation, tax strategy, political lobbying, and whistleblower programs.
When Did ESG Start?
ESG can be seen as a concept that evolved from older models for sustainable business practices, including EHS (environmental health and safety) and CSR (corporate social responsibility). The primary difference between ESG and its predecessors is the focus on tangible business outcomes.
To better understand ESG and its influence on business, let’s do a little time traveling. It’s 2006. You can’t go anywhere without hearing Crazy by Gnarls Barkley. Your coworkers keep talking about the new Leonardo Dicaprio movie The Departed. And the United Nations has released their Principles for Responsible Investment (PRI) report consisting of the Freshfield Report and “Who Cares Wins”, the catalyst for the modern ESG movement.
This report argued that ESG criteria should be considered in the investment analysis of a company because these key areas impact long-term financial performance. Developed in response to global sentiment and evidence in favor of ESG practices, this group of reports sparked widespread adoption among prominent investment firms. Soon after, corporations followed suit.
Who Sets ESG Standards?
Unlike the B Corp movement, which requires companies to meet predetermined standards to become a certified B corp, there are no official “rules” in ESG. There isn’t an official regulatory body. This can be freeing, as your team has the ability to develop standards personalized to your company and industry, but it can also be intimidating for new practitioners looking for guidance on how to develop their own ESG framework.
The good news is the International Sustainability Standards Board, a brainchild of the Cop26 summit, aims to publish global standards in 2023. In the meantime, you can look to companies including Forrester Research, MSCI, Sustainalytics, and Gartner for inspiration on how to measure your company’s ESG impact.
Why is ESG Important?
The answer to this depends on who you ask. Climate activists may say that ESG is vital to the preservation of our planet. Corporate executives may cite reports on the financial benefits of an ESG business strategy. Employees might mention that they’d prefer to work at a company that reflects their values and prioritizes their well being. The most important takeaway here is that ESG has benefits for every stakeholder.
Benefits of Implementing ESG
Since ESG criteria continues to grow in importance to investors, consumers, and talent, it’s no surprise companies in all types of industries are considering what an ESG strategy can do for them.
In 2020, NAVEX Inc. found that 88% of publicly traded companies, 79% of venture and private equity-backed companies, and 67% of privately-owned companies had ESG initiatives, and this number is only growing. While I wouldn’t normally encourage you to jump on the bandwagon (no, I won’t be buying a Tesla), in this case, hop on board before you get left behind.
Need a little more convincing? I have you covered.
The Business & Sustainable Development Commission found that implementing an ESG framework could increase economic growth. In their report, they assert that pursuing sustainable and inclusive business models could unlock economic opportunities worth at least $12 trillion a year by 2030 and generate up to 380 million jobs.
There is a growing demand for more equitable and sustainable practices in nearly every sector. From consumer goods to software, people want to see companies using their influence to take action. In fact, 76% of consumers say they will stop buying from companies that treat the environment, employees, or community poorly. This shows that failing to implement ESG corporate strategy framework could cost you.
According to a 2022 study by asset management firm Capital Group, 89% of investors consider ESG issues in their investment strategy.
But wait, there’s more.
A report by Morningstar found that global ESG fund assets reached approximately $2.5 trillion at the end of 2022. That’s up from $2.24 trillion at the end of the third quarter. These figures prove that ESG is no passing trend–it’s a full-blown necessity for companies that rely on investment to power their organization.
Adherence to ESG standards signals to investors that your company is working to mitigate long-term risk in key areas that can affect financial performance. For example, climate-related weather events have the potential to disrupt vital operations. By actively taking precautions to protect the company against these incidents, organizations can begin to future-proof their operations and inspire trust in investors.
Talent Acquisition and Retention
An ESG strategy can help you compete for and retain top talent. Let’s say an engineer was looking at two offers from two different companies. Pay and benefits are the same, but one company has a reputation for ESG compliance. Evidence can be found in their programs, ratings from ESG agencies, and reviews by real employees. Which of these companies is most likely to win over the candidate?
A study by MarshMcLennan found that top employers, measured by employee satisfaction and attractiveness to talent, have significantly higher ESG scores than their peers. For those of us that have been paying attention, this correlation isn’t surprising. Younger employees in particular are more likely to consider a company’s ethics in their job evaluations. In 2022, Deloitte found that about half of senior millennial and Gen Z employees have made decisions about which organizations to work for based on ethics.
Companies with solid ESG strategies can also improve employee satisfaction, which can then positively impact productivity and retention. These too can contribute to overall profitability.
How to Leverage ESG in B2B marketing
Once you have an ESG strategy in place, it’s important you let stakeholders know about it. This is where marketing comes in.
Think of your company’s ESG strategic plan as a value driver. It’s something that can differentiate you from the competition and benefit your customer. When developing messaging around ESG, consider the following questions:
- What kind of impact does your ESG strategy have on your team, your community, or the environment?
- How does your ESG strategy affect customers? (i.e. reduced costs, fewer barriers to growth, etc.)
- How does ESG affect your company’s purpose and mission?
Once you’ve formulated the answers to these questions, you can begin building out a strategy that communicates these benefits to your audience.
Well, that’s all folks! Stay tuned for more articles that explore B2B companies’ place in creating a more sustainable world.