What is ESG – a guide for businesses

The environmental aspect focuses on how the business minimises its impact on the environment.

It covers the business’s products/services, the supply chain and operations.

ESG allows the business to target different areas of its organisation and implement more sustainable, ethical practices.

Examples of environmental business practices include:

• reducing energy and using renewable energy sources to become a net zero organisation
• developing greener products and services
• switching to zero-waste products or sustainable packaging using biodegradable materials
• reducing carbon emissions by changing to LED lighting
• encouraging recycling and reducing the amount of waste destined for landfill.

The social aspect focuses on how a business impacts wider society and workplace culture.

Organisations can positively contribute to fairness in society, investing in fair and equal opportunities and conditions for employees, people working in the supply chain, and local communities.

Equality and fairness are at the heart of this aspect and examples of social and ethical business practices include:

• ensuring products are safe and customer data is secure
• preventing abuses within the supply chain, such as labour rights, including modern slavery and freedom of association
• providing training and supporting health and safety, and wellbeing
• promoting equality in the workforce with diversity and inclusivity policies
• investing in local community projects, such as funding educational initiatives.

Governance refers to the processes of decision-making, reporting, and the logistics of running a business.

It also looks at the business's ethical behaviour and its transparency with stakeholders about its activities.

Governance is linked to the environmental and social aspects of ESG in that it looks at the transparency and decision-making behind them.

Examples of governance practices include:

• accurate reporting to stakeholders on financial performance, business strategy and operations
• ensuring business leaders and managers are accountable for risk and performance management
• undertaking business ethically, such as preventing bribery
• ensuring diversity in any leadership team and being open about executive pay.

Ensuring good governance in your business can appeal to investors and your supply chain and practising good governance may also help enable businesses to grow.

Even if your business isn't looking for investment, adopting an ESG framework has benefits – from reducing risk and lowering costs to improving reputation and attracting new customers.

Incorporating ESG into your organisation could help your business's reputation as it indicates you have a transparent plan that focuses on helping the environment, supporting diversity and equal opportunities, and ensuring ethical business decisions.

Initiatives that reduce waste and the amount of materials used, such as in packaging, can reduce costs.

Reducing energy costs, such as switching to LED lighting, could also lower overheads through smaller energy bills.

Some employees may be looking to work in more eco-conscious companies committed to implementing favourable ESG policies.

Employees may want to associate themselves with companies that foster a diverse and inclusive workplace, with employee support programmes for mental wellbeing and improved work/life balance.

Some customers may be more willing to buy a similar product from a more ethical brand than another business – even if it costs more.

Research by McKinsey found that over 70% of people said they would pay an additional 5% for a green productLink opens in a new window if it met the same standards as non-green alternatives.

Research by Charles StanleyLink opens in a new window found that up to half (48%) of investors are looking to increase their ESG investments within the next three years.