Why is the E in ESG so important to companies?
This column is part of an ongoing series on environmental, social and governance (ESG) issues and what they mean to business leaders and organizations.
I can still vividly remember when the Exxon Valdez struck Bligh Reef in Alaska’s Prince William Sound in March of 1989. The collision split open the ship’s hull and released 11 million gallons of crude oil into the water. My friends and I were glued to our television screens, watching the devastation to seabirds, otters, seals and whales.
The Valdez incident is an extreme example of an environmental disaster, but it was a wake-up call for corporations and consumers. The magnitude of the damage shined a spotlight on the relationship between business and the environment.
While the concepts underlying environmental, social and governance (ESG) factors had been discussed as early as the 1960s, the conversations heated up over the 1990s and early 2000s. In 2004, former U.N. Secretary General Kofi Annan invited 50 CEOs of major financial institutions to participate in a global initiative to find ways to integrate ESG into capital markets. According to a recent Forbes article on the rise of responsible investing, “That report made the case that embedding environmental, social and governance factors in capital markets makes good business sense and leads to more sustainable markets and better outcomes for societies.”
Today, the E in ESG considers how a company performs as a steward of nature, how it uses natural resources and how its operations affect the environment – from the energy and resources it uses to the emissions or wastes it discharges. Of all the letters in the abbreviation ESG, the E is particularly complicated, as environmental factors encompass nearly every aspect of nature and are interconnected on a global level.
While most leaders agree that protecting our planet is a good idea, how to go about it as a business is much more complex. For even the most motivated leadership team or board, balancing returns with regulations and scrutiny from investors, consumers and communities, as well as brand and employee engagement considerations, can pose significant challenges.
While there have been advancements in standardizing measurement of ESG criteria, “surprisingly few companies have made meaningful progress in delivering on their commitments,” says a recent Harvard Business Review article that explores the link between ESG targets and financial performance. The authors note, “Of the 2,000 global companies tracked by the World Benchmarking Alliance, most have no explicit sustainability goals, and among those that do, very few are on track to meet them.”
Despite the relative lack of reported progress, it is becoming increasingly important for leaders to put ESG strategies in place, specifically around environmental issues. According to a separate Forbes article, “ESG performance, the managerial decisions that drive it, and the data points that reflect it have become a form of proxy measurement on the quality of a business’s management, right alongside its financial data.”
In short, investors, consumers and employees are watching public and privately held company management and board decisions – decisions that can determine the future of companies and of the environment.
Given the increasing attention on environmental issues, I turned to local leaders to ask, “Why is the E in ESG so important to companies?”
Mandi McReynolds, head of global ESG, Workiva: Transparency around ESG with environmental disclosures, strategy and planning has become integral to investor decisions. Companies undoubtedly have experienced increased pressure to be able to report on their efforts. However, 72% of individual investors believe that companies should make it easier for them to judge ESG efforts through data. When asked if they found it difficult to trust what companies are disclosing about what they’re doing for the environment and society, only 15% of respondents disagreed. This challenge has added global regulation pressures to companies as a response to investor demands for better, trusted environment data to make decisions.
Adam Hammes, ESG director, North America, SGS: The E (environmental) is arguably the strongest place to get started for any company. Measuring and managing energy, water, fuel and waste is straightforward and the cost savings can be huge – especially for heavy industry and manufacturing. The necessary cost and consumption data is readily available from invoices, so businesses can readily calculate return on investment for improvement projects. Climate action? You need energy, water, fuel and waste data before you can create a greenhouse gas emission inventory – your first step. And additional gains in recruitment and retention for the high-performing leaders can be even more attractive.
Kathryn Kunert, VP, Economic Connections and Integration, MidAmerican Energy: The E in ESG is not only something we accept – we embrace it. Environmental respect is one of MidAmerican Energy’s core principles. We are a renewable energy leader striving toward achieving net-zero greenhouse gas emissions – which helps our customers meet their sustainability goals while supporting the environment. It is important to have a plan in place as it guides our operations for today, ensuring we are prepared for tomorrow. Respecting our environment is the foundation for the third part of our three-legged stool that keeps us balanced and able to deliver on what our customers want – affordable, reliable and renewable energy.