Why ESG Is Important for Every Business
by Jaidyn Farar
You’ve heard the acronym ESG, and you know it has something to do with sustainability.
But what exactly does ESG stand for? Is it just a passing trend, or something that will continue to be important throughout the coming years? When should your business start focusing on ESG?
A few months ago, Alanna Fishman from FTI Consulting joined Lori Boyer on the Unboxing Logistics podcast to address these questions (and more). In this article, we’ve compiled some key insights from their discussion.
Ready to dive in?
What does ESG stand for?
ESG stands for environmental, social, and governance, which are the three key factors used to measure the sustainability and ethical impact of a company. Investors evaluate ESG to determine how stable an organization is, but ESG is just as relevant for employees and consumers.
Let’s break the three factors down:
- Environmental. What is a company's impact on the natural environment? This includes its practices related to climate change, resource use, and pollution.
- Social. What kind of relationships does a business have with employees, customers, and communities? The social factor focuses on things like labor practices, diversity, community engagement, and human rights.
- Governance. This category examines a company's leadership, executive pay, audits, internal controls, and shareholder rights.
Is ESG the same thing as sustainability? According to Alanna, the concepts aren’t synonymous. ESG goes beyond most people’s definitions of sustainability. It involves identifying specific risks that could negatively impact a business, as well as things that could drive value.
These two examples from Alanna help illustrate the difference between ESG and sustainability:
- Sustainability statement. “We believe in minimizing our footprint on the environment by reducing the amount of carbon we emit into the atmosphere.”
- ESG statement. “We are going to reduce our carbon footprint by X percent by 2025 because [not doing so] could result in millions of dollars of fines or fees.”
The key difference? While the sustainability statement is high-level, the ESG statement includes specific numbers and goals, making it possible to measure success.
Why is ESG important for businesses?
Measuring environmental, social, and governance factors allows you to identify risks to your organization’s financial health or reputation. But risk mitigation isn’t the only benefit of ESG. Businesses focused on ESG tend to appeal more to consumers and investors, and they succeed in retaining skilled employees.
For Alanna, ESG is a no-brainer; it’s simply part of running a good business. As she puts it, “You wouldn't run a good business by turning a blind eye to things that have an impact on you.”
She continues, “ESG shouldn't be a burden. … It's what brings in the best talent. It's what makes you want to stay for the long term. It's what makes you a better citizen of the world. It's what makes your company a better business.”
When should you start focusing on ESG?
While many countries have passed regulations focused on the environmental element of ESG, the United States has moved more slowly. But you shouldn’t sit back and wait for regulations to be created before taking action. Alanna advises preparing before new laws are passed, not scrambling to get into compliance after the fact.
If you’re asking “Does this really impact me right now?” here’s Alanna’s response:
“The answer is yes. Do not sit on your hands. Get on it, figure out how this applies to you. … You can't make the decision to unilaterally sit on the sideline. … You're part of someone's supply chain. … You have customers that care about this. You have peers, you might even have investors that care about it.”
A word of caution: avoid greenwashing
Once, businesses could claim anything they wanted, and it was difficult to know if they were telling the truth. In today’s digital world, that’s no longer possible. As a result, organizations need to be very careful about the claims they make.
Greenwashing means making false claims or misrepresenting data about your environmental and sustainability initiatives. Organizations that greenwash can’t expect to get away with it for long. Customers, competitors, investors—everyone is naturally skeptical, eager to catch a brand or retailer in a lie.
Alanna emphasizes the dangers of greenwashing, pointing out that it can have devastating financial consequences.
“There are people who point to you and say, ‘They said this [but] they can't prove it. It's fake. It's false.’ … That can cost millions of dollars of effort. So greenwashing is here. Most of it is unintentional, but what you're doing is being scrutinized, so be careful what you say.”
How to get started with ESG
Wondering how to get started with ESG at your organization? Listen to Alanna’s podcast episode, Navigating ESG in Logistics and Retail, for practical advice on assessing your company’s goals and deciding where to begin.