An investment firm recently conducted a survey that found, finding nearly 80% of clients believe ESG scores are more important than they were five years ago. Another survey found millennials, a group that will comprise 75% of the workforce by 2025, are twice as likely to invest in companies that host social or environmental goals.
The concept of ESG standards is nothing new; recent standards are born from an evolution of concern. For example, in the 1990s, society at large grew more aware concerned as to how the pursuit of business profits affects people and the planet.
In the past, ESG scores were a call to “screen” other businesses and potential partners. Today, carbon emissions, inequality in the workplace, and a green supply chain are reasons to make a qualitative decision about other companies regardless of monetary opportunity.
Why ESG Scores Are Becoming More Important
Volkswagen’s former chief executive is to pay $13.7 million for breaches of due diligence associated with the company’s emissions scandal. The German parliament has accused Martin Winterkorn of lying about prior knowledge of the matter.
In 2017, VW pleaded guilty to criminal charges brought forth by the United States of America. Charges included conspiracy to defraud the government and violations of the Clean Air Act. The company had to pay $20 billion in fines.
VW’s stock has experienced a recent surge in 2021, so it’s difficult to measure whether the scandal is responsible for further losses. However, voices throughout the industry have recently called for an increase in responsibility.
Some believe it’s too easy for a given company to overstate or embellish its commitment toward the environment or social issues. RSo, regulators want to enforce the message that a pledge toward ESG standards is to be more than lip service.
A number of companies have been the target of lawsuits that claim ESG standards aspirations have not been actualized. some have not actualized aspirations relating to ESG standards. Litigators point out the potential for legal ramifications —; when company stock prices fall after a scandal or violation, its shareholders may file a civil lawsuit and cite that prior statements the company made were to be false and contradictory.
In related news, China’s government punished ride-hailing app, Didi. The Chinese government swiftly ordered Didi banished from app stores. This came just days after Didi’s initial public offering. And, what happened next? Didi’s stock fell, which serves as an example of how regulation can influence public perception and a company’s profits money.
Making ESG Scores Important
To start, take control of your ESG initiatives. Rather than viewing the media and public as potential threats, use public relations and social media in such a manner so that internal messages are rightly amplified. Companies want internal messages to inspire partners and investors; the media and the larger public can be huge allies in facilitating those messages.
Make ESG important to the company by establishing a clear connection between key executives and the commitment to ESG standards. While an in-house team or outsourced provider may be in charge of ESG analysis, the entire team will mirror the commitment of company leaders.
A commitment to ESG analysis and reporting is just lip service unless a company takes action. Therefore, assess what can be measured and shared with the public to express the company’s dedication to ESG standards. Identify what’s to be measured, how to measure it, and establish consistency in reporting.
Reliance on third-party data aggregation is not enough. DFor, data is only as good as the ability to use it effectively. Enterprise-level companies may invest in building internal tools and resources to address ESG analysis and reporting. However, many rely on third-party services for ESG reporting.
Using a third-party service is advantageous. Experts help shape internal messaging as well as share newsworthy information with the media and general public. While For, numerical ESG scores do not resonate with the general public, as much. ESG services allow companies to translate internal actions so stakeholders, investors, and the public understand a company’s tangible commitment toward the environment, society, and governance.
ESG Scores and Internal Reporting
While many analysts use similar data sets, the way in which a company measures and reports ESG scores will differ. For example, measuring carbon emissions is going to be a higher priority for industrial and manufacturing companies. Alternatively, an issue such as gender equality may be a bigger topic within industries historically known for disparities.
Therefore, an ESG strategy reflects what’s most important to a company and its stakeholders. Government regulation plays a part but each company must take ownership of analysis, establishing which ESG elements are of paramount importance.
Consider elements that could be a part of a company’s ESG score and focus:
An emission’s reduction score may reflect a given company’s capacity to reduce the use of certain materials or improve conditions of production. Additionally, it may reflect how a company has improved the output of emissions in association with supply chains.
A workforce score may analyze employee job satisfaction, workplace safety, equal opportunities, and methods of advancement.
An innovation score may measure commitment toward developing newer ways to introduce technology.
A community score may measure attempts to give back to a hosting city, adhere to business ethics, and protect public health.
ESG Scores Are Becoming More Important
ESG scores are becoming more important as topics related to the environment, society, and business governance make headlines. One news pundit recently voiced that climate change and the environment is going to be one of the overarching news stories of the next decade. Moreover, a call for social change and reform is influencing people, businesses, and societies around the world.
It’s time to embrace ESG strategy. ESG data allows for greater awareness and the ability to articulate how well a company’s ESG scores align with its mission statements and promise to customers and investors.
In a final means to align ESG matters with present-day business affairs, let’s examine Juul, a once-profitable e-cigarette company. Today, it’s fighting to survive due to a loss of $500 million in sales, an atrophied workforce — cut 75%, and the end of many state and local lobbying campaigns.
Early popularity stemmed from a naive belief that e-cigarettes were a safer alternative to cigarettes. Based on 2018 numbers, Juul enjoyed a 75% hold on the vaping market. However, the company’s reputation soured as it became synonymous with the teen vaping surge.
While e-cigarettes have existed since the early 2000s, popularity did not rise until Juul began infusing vaping solutions with a variety of flavors, making e-cigarettes attractive to minors. Juul’s reign went undeterred until attracting interest from the F.D.A. in 2018.