In our day and age, you can’t afford to ignore ESG principles anymore. Investing in ESG can increase your company’s value proposition.
The world of investing has been slowly but steadily changing over the last few decades. In order to grow and be successful, companies nowadays need to look beyond their own bottom line. Society expects companies, especially multinational corporations, to lead the way to positive socio-economic change and improvements. The trend is here to stay and is essential not only for veteran companies but for start-ups and newer businesses as well.
In order to attract new investors, today’s companies have to adopt a particular mindset and translate it into decisive action. The umbrella term for this relatively new methodology is ESG — an abbreviation that you can expect to hear a lot more of in the future. ESG is essentially a set of standards that determine the sustainability and societal impact of an investment in a company or business.
In this article, we will explain what ESG is and how its principles shape the modern investment world as we know it. We will also explore why following Environmental, Social & Governance are the areas that you should focus on in order to attract investors for your business.
What Is ESG
ESG stands for Environmental, Social & Governance — the areas in which companies need to strive to foster positive change. What started as simple attempts to demonstrate corporate responsibility has evolved into one of the main factors that determine brand reputation, investment value, and even revenue. Also known as “impact investing” and “sustainable investing”, the ESG mindset makes companies consider their role in society and adjust their investment decisions accordingly.
Let’s dive deeper into the three main areas that ESG investing focuses on.
- Environmental: Topics like climate change, sustainable energy, and pollution prevention are more popular and important than ever. ESG principles put a strong emphasis on tackling issues that have to deal with water, air, land, ecosystems, and human health. Each company can approach those issues in a different way, depending on their nature of work.
- Social: Diversity, inclusion, and equity are among the hottest social topics today. ESG principles take aim at them, as well as at working conditions, health at the workplace, and mental support. Companies who invest in ESG practices find their employees to be more productive and loyal.
- Governance: The rise of social media has led to company executives being under increased scrutiny. Key decision-makers find themselves in the spotlight and every company move may result in negative PR. The ESG mindset promotes corporate transparency and disclosure of information, shareholder protection, and board accountability.
How Do ESG Principles Increase a Company’s Value Proposition?
A company’s ESG efforts can be directly linked to its success because they make it more attractive to employees, customers, and most importantly — investors. But why is ESG investing one of the most effective ways to attract new investors? ESG data helps investors get a better understanding of a business and its associated opportunities and risks. Investors look for businesses that take actions towards sustainability, exponential growth, long-term brand value.
Below, you can see the three main ways in which ESG principles determine the value proposition of any company. Those can be applied to both newcomers and veteran companies who are looking to attract fresh capital.
- Social and Human Capital Management
Company values have not been an important factor in the past. However, nowadays, they are considered essential from an investor’s point of view. Businesses that are worth investing in must be able to retain employees, decrease turnover, and provide safe and healthy work conditions. On top of that, employee advocacy works wonders when it comes to brand perception and reputation.
Companies that invest in ESG practices are able to perform better in the categories outlined above. As a result, they are capable of sustainable, long-term growth, which makes them quite attractive for investors.
- Risk Assessment and Mitigation
ESG principles are also essential when it comes to assessing and taking care of risks. As we already mentioned, failure to adhere to ESG standards can result in damage to a brand’s reputation and bottom line. Companies that invest in ESG are popular among investors because they have lower volatility and are better protected against both internal and external risk factors.
A stable company will always have the confidence of investors, along with better interest rates and financing options. Investing in ESG practices is one of the best ways to ensure proper risk mitigation, no matter the size and industry of a company.
- High Standards of Governance and Accountability
Some of the biggest losses in history were the fault of poor governance. Investors need to be confident in the integrity of the board of directors and senior management of a company in order to pour money into it. ESG ensures that accountability is in place and establishes checks and balances that hold board members responsible for their actions.
Adhering to the ESG mindset will make a company trustworthy and transparent, which are some of the most important factors that investors are looking for. The goal is to ensure that the interests of both investors and company management are aligned. As a result, a company will be able to grow in a sustainable way.
The principles of ESG are being adopted by both small and large corporations throughout the world. The trend is set to continue, which makes ESG one of the most essential factors that investors are considering when making decisions. Companies that are not ESG-compliant are considered a serious risk and rarely get the funding they need. In fact, more and more investors are choosing ESG-friendly companies as they are better long-term investments. Additionally, all major LPs are actively pushing investors to find ESG compliant businesses as a risk mitigation move.
Finally, we need to mention that there are dedicated ESG investors that have access to considerable funds. If a company adopts the ESG mindset, it can attract them and get the boost they need to grow.
About the Author:
Shannon Bergstrom is a LEED Green Associate, TRUE waste advisor. She currently works at RTS, a tech-driven waste and recycling management company, as a sustainability brand manager. Shannon consults with clients across industries on sustainable waste practices.