If you’re a business owner, you’ve most likely heard the term Environmental, Social, and Governance or “ESG” as it has steadily evolved from a trendy topic to a material business consideration within the past several years. ESG is a non-financial metric that examines business operations through the lens of a company’s social and ethical relationships to its environment, its stakeholders, and the community at large.
Because ESG encompasses a wide range of considerations, ESG policies will therefore vary from company to company. Small businesses may feel that they lack the resources that larger companies have access to for measuring and implementing ESG initiatives. Or they may feel that the effort required for ESG initiatives outweighs the potential positive impact. In reality, implementing an ESG policy, even on a small scale, can benefit a business of any size.
Talent—Implementing ESG measures can help in both attracting and retaining socially conscious talent, especially among younger candidates. Policies that specifically promote employee well-being can appeal to prospective employees while also lowering employee attrition rates. Even without understanding the full scope of it, as a business owner, knowing today’s worker has been trained to be interested in these types of programs can assist in hiring and retention.
Brand Value—A robust ESG program can enhance your company’s brand value and reputation among consumers and clients. Consumers are becoming increasingly aware of ethical spending and are looking more closely at the practices of the companies they support. Likewise, if a company does business with corporate clients, those clients are likely also under pressure from their own constituents to reevaluate their ESG impact and the impact of their supply chain—which includes you. Again, the impact of social media influence cannot be denied, and even a small-scale program can have a big impact on a small business.
Financial Performance—Multiple studies have linked ESG initiatives to improved financial returns, largely due to mediating factors such as improvement in innovation, operational efficiency, risk management, stakeholder relations, and firm reputation. These studies also indicate that ESG initiatives are more likely to drive positive financial returns when enacted over prolonged periods of time.
Investor Interest—If your company is interested in the private equity or venture capital space, a strong set of ESG policies is a way to help differentiate your business. Many investors factor in ESG criteria when evaluating investment opportunities, thinking more critically about the environmental and social ramifications of their investment decisions.
Risk Management—ESG efforts can proactively mitigate ESG-related risk, both legal and financial. Some examples of ESG risks scenarios: 1) improper waste disposal protocols lead to a hazardous chemical spill; 2) failure to properly handle an employee’s harassment claim leads to a lawsuit; 3) insufficient internal controls allow defective products to be sold, which must then be recalled.
This element of ESG measures a business’ impact on nature and the environment, especially with respect to climate change. A business’ carbon footprint includes pollutants, emissions, energy usage, etc. from the company itself as well as from any activities relating to the business’ operations. Purchased electricity, purchased goods and services, transportation and distribution, production of waste, business travel, and employee commuting are all examples of indirect sources of emissions and pollution that should be accounted for in a company’s ESG assessment.
• Greenhouse gas emissions (GHG) i.e., your “carbon footprint”
• Energy usage
• Water usage
• Usage of natural resources
• Voluntary tracking and reporting of environmental metrics (*see more below on reporting standards)
• Setting of reduction targets
• Participating in carbon offset projects (e.g., reforestation, renewable energy, destruction of greenhouse gases)
• Commuter incentives for public transport
• Reducing business travel where possible
• Recycling paper, equipment, furniture, etc.
• Utilizing energy-efficient building features
• Paper reduction/using electronic documentation
• Proper disposal of hazardous waste/materials
• Using sustainably sourced materials
• Holding your vendors and suppliers to certain environmental standards
Social issues are all about how a business handles its relationships with people—its employees, partners, vendors, suppliers, clients, customers, and members of the local community. This category often overlaps with other initiatives such as CSR (corporate social responsibility) and DEI (diversity, equity, and inclusion).
• Sexual misconduct and harassment
• Bias and discrimination
• Diversity, equity, and inclusion
• Employee wellness (mental & physical)
• Customer engagement and satisfaction
• Ethically sourced labor and materials
• Working conditions
• Workplace culture
• Sexual harassment & bias training
• Incorporating DEI considerations into recruiting strategies
• Pay equity
• Bringing in a healthcare professional to administer voluntary flu shots
• Supplementing lunch snacks with fresh fruits and vegetables
• Allowing employees to take a working walk on company time
• Providing mental health services such as counseling
• Adopting company philanthropy—donating and/or providing volunteer opportunities
• Using fair trade products
• Assisting employees with learning new skills/pursuing higher education
Governance is the collection of systems by which a business manages itself and the processes by which it provides oversight for its operations. Good corporate governance assures that a company remains accountable to its stakeholders.
• Executive pay
• Internal controls
• Diversity in leadership
• Tax strategy
• Code of conduct designed to prevent bribery and corruption
• Whistleblower incentives
• Executive bonuses partly dependent on stakeholder satisfaction
• Structures that avoid conflicts of interest
• Proper auditing procedures in place
Because most businesses are not legally required to disclose ESG metrics or meet certain ESG standards, such policies and reporting measures are largely voluntary and are a way to stay ahead of the curve. There is no single framework that sets the standard for ESG metrics, which can make it difficult to decide which framework to follow and which goals to pursue. Experienced counsel can help companies think ahead and evaluate what components to include in an ESG program. Counsel can also assist with creating and implementing compliance protocols, updating handbooks, and establishing meaningful performance metrics.
Some businesses are interested in meeting the criteria for recognized ESG-related certifications or reporting frameworks, similar to the potential advantages of minority-owned status. Legal counsel can aid in determining which of these frameworks is the most appropriate for a company’s business goals and available resources and how to provide the necessary documentation for each. Some of these frameworks/certifications may include:
Legal counsel can help create ESG initiatives that fit the mission, vision, and core values of your business and your customers—whether you are just starting an ESG program or want to augment your already-existing ESG policies.
If you have any further questions regarding ESG or how to integrate ESG policies into your business plan, please contact Julie-Karel Elkin.