What Is Environmental, Social, and Governance (ESG)?

For most companies today, a commitment to doing right by the environment and their community, investors, employees, and key stakeholders has become standard operating practice.

Yet a company saying it’s committed to the greater good is one thing. The company being able to effectively measure and track that commitment — and its impacts — is something else entirely.

Enter environmental, social, and governance (ESG). From a sustainability and social good perspective, ESG criteria provide a crucial and established framework for assessing a company's impact on the world.

Investors, consumers, employees, and stakeholders are increasingly prioritizing ESG to ensure ethical and responsible business practices. In turn, companies that make a meaningful commitment to ESG create an opportunity to develop and maintain a competitive edge.

The Three Pillars of ESG

The three pillars of ESG focus on three distinct categories. When taken together, these categories offer a roadmap for ethical and sustainable business practices. Let’s break down the categories:

Environmental

The environmental component of ESG evaluates how a company impacts the planet, both from a local and global perspective. Notably, the factors measured can vary from industry to industry, but the standard measurements focus on four aspects:

• Carbon Footprint: Companies are assessed on their greenhouse gas emissions and efforts to reduce them.
• Resource Management: Efficient use of energy, water, and raw materials contributes to sustainability.
• Waste and Pollution: Reducing industrial waste and promoting recycling initiatives minimize ecological harm.
• Climate Change Adaptation: The degree to which a business has developed strategies to mitigate climate risks and ensure resilience assesses the company’s ability to adapt.

Social

The social aspect of ESG focuses on how a company interacts with its employees, customers, and communities. Here are some key social considerations:

• Labor Practices: Fair wages, diversity, inclusion, and employee well-being are essential.
• Human Rights: Ensuring ethical supply chains and avoiding exploitative labor shows a commitment to upholding human rights.
• Community Engagement: Contributing to local communities through social programs and philanthropy fosters goodwill.
• Customer Relations: Ethical marketing, product safety, and consumer protection enhance brand reputation.

Governance

Governance focuses on the internal systems, policies, and leadership practices that guide corporate decision-making. Strong governance includes the following:

• Board Diversity and Independence: A diverse and independent board improves corporate oversight.
• Transparency and Accountability: Clear financial reporting and ethical business practices build trust and increase opportunities to avoid or identify corruption and fraud.
• Executive Compensation: Fair and performance-linked pay aligns leadership with stakeholder interests and limits reputational risk.
• Regulatory Compliance: Adherence to laws and industry standards not only maintains trust and legitimacy, but also helps avoid potential fines or punitive actions that could cripple business.

The ESG Difference

Implementing and executing on a robust ESG program can help deliver a range of benefits. Through ESG, companies can ensure consistent regulatory compliance, attract socially conscious investors, and secure the best talent from the prospective employee pool. Here are five ways a strong ESG commitment benefits a company:

1. Investor Interest: ESG-focused investments have grown significantly as investors seek companies with sustainable and ethical practices.
2. Regulatory Pressure: Governments and regulatory bodies are enforcing stricter ESG reporting and compliance measures, so staying a step ahead is ideal.
3. Brand Reputation: Prioritizing ESG fuels stronger consumer trust and loyalty while attracting talented employees who value working for a company committed to operating ethically.
4. Risk Management: Addressing ESG issues helps mitigate risks related to environmental disasters, social unrest, governance failures, and damaging PR.
5. Long-term Profitability: Studies have shown that sustainable businesses are more resilient and better positioned for long-term success.

Making It Happen

A meaningful ESG program doesn’t just appear overnight. Yet by taking a series of focused actions, organizations can enhance their ESG efforts. Here are five steps to strengthening ESG-related performance:

1. Assess Current ESG Impact: Conducting audits of existing practices can help identify areas for potential improvement.
2. Set Measurable Goals: Defining clear sustainability, social, and governance objectives can help keep the company on track to meet goals and make continual progress.
3. Engage Stakeholders: Collaborating with investors, employees, and communities helps demonstrate transparency and responsiveness to accelerate effective ESG initiatives.
4. Report Transparently: Publishing regular ESG reports highlights progress and identifies challenges while positioning the company to cultivate a reputation of caring about operating ethically.
5. Adopt Sustainable Practices: Implementing green technologies, establishing ethical sourcing programs, creating a diverse and welcoming environment, and amping up community involvement demonstrate a real commitment to ESG principles and targets.

Ultimately, actions are what deliver the most benefit from an ESG program.

Conclusion

Evolving beyond a corporate buzzword, ESG has become fundamental to responsible business operations. Prioritizing environmental sustainability, social responsibility, and strong governance can help your company build resilience and reputational strength while creating long-term value for all stakeholders.

By executing on a sound ESG strategy, your company won’t just talk a good game, but also demonstrate a commitment to sustainability that’s evident every day.

OneStream offers a uniquely unified ESG reporting and planning solution that consistently aligns with reliable financial data. It combines CO2e collection and calculation, streamlining ESG reporting. Its features include simplified data collection, centralized process management, framework and factor ingestion/management, and Scope 1, 2, and 3 carbon calculations. To learn more about it, visit our ESG Reporting & Planning page.