Recap: ESG Ratings
As we mentioned in the last blog post, the phrase ESG Reporting was coined in 2005 to refer to how companies adhere to modern environmental, social and governance standards. According to the Harvard Business Review, “’Environmental’ disclosures include greenhouse gas emissions, water usage, waste disposal, and more. ‘Social’ disclosures include diversity, labor relations, product safety, employee health and safety, community development, and more.” ESG scores provide valuable information about companies for their customers, investors and communities, and paying attention to them is a great way to establish trust and loyalty while becoming good global citizens.
Today I’m going to talk about the third letter in the acronym we’ve been covering for the past few weeks. Keep in mind, though, governance is kind of a different animal. While not always easy, I can visualize a path for a company to undertake new social or environmental initiatives. There have been so many great examples out there over the last couple of years, and a ton outlined in our previous ESG blog entries. But everything about governance is so internal and company-specific, I can’t even begin to write anything close to a universal step-by-step guide. Add in the fact that I’m one of the least qualified people on the internet for telling companies how they should be run, which is saying something, and you can see why I won’t be writing a book on this subject any time soon.
But what I can do is outline a few of the criteria that factor into the governance section of an ESG score, and outline a couple examples of why it’s in your company’s best interest to give ESG a seat at the table next time a big decision has to be made. So let’s dig in, shall we?
G is for Governance
It’s really nice to see the substantial climb in popularity of ESG scores in the last few years. I’m glad it’s gaining prominence for businesses simply because I think it’s important. Having a solid metric for how you’re performing environmentally, socially, and governmentally not only gives potential investors a more solid foothold when considering a potential investment , but it’s been shown that companies that focus on sustainability (the blanket term for just about everything an ESG score touches) perform better over time than other companies.
Governance is interesting because while a company’s environmental and social impacts may not have been as easily trackable even a few years ago, the fundamental structure of a business has records dating back potentially decades, so there’s a lot more concrete information to work with when determining that score. Things like management structure, executive compensation, audits, shareholder rights, looking at potential conflicts of interests in board members, and even employee relations will all have some kind of record to use when compiling information for a potential ESG score. All things that dive into the heart of a company, examined to make sure that the business is running well, ethically speaking. A good governance score means that the potential for corruption or ethical violations is kept to a minimum, which might sound bad initially, but even the most honest business in the world can leave the door open for things like that without realizing it. Companies that grow quickly, will have to take an especially long look at their structure and potentially consider some heavy remodeling if they want their governance score to really shine.
So the big question is, why? When all of those factors are so hard-coded into the company’s DNA, and things are running fine from year to year, why try to change anything surrounding governance just to increase your ESG score? Simply put, it’s because in most cases, the potential benefits far outweigh the hassle.
Become a Diamond in the Rough
It’s true that almost no company has received a perfect ESG score. This means if you start up a few initiatives as we talked about in the previous two blog posts, you might do enough to get your company securely within the average score threshold. And really, if you stopped there, who could blame you? Investors will look favorably on you, you’d be doing your part for the planet, there’s no reason to bend over backward when nobody should expect perfection across the board, right?
But here’s the thing: a lot of companies—especially those in tech—tend to give governance a bit of a blind eye. They generally score lower in that area, despite the fact that strong governance tends to increase a company’s performance over time. When it comes to potential investors who might be looking at your ESG score, focusing on good governance is an easy way to stand out above the crowd. Another reason to focus on the big G? Employee relations is a factor in governance scoring. And ensuring your employees are happy will make you more desirable to the workforce as a whole. So, if you make sure your internal company values are on point, you’ll be able to build something that’s attractive to both investors and potential employees, primed and ready for massive growth—and with that big ESG score, you’ll look good doing it, too.
Tying it All Together
I think it’s easy to get caught up in the popularity of environmental and social aspects of ESG scores, and I am all for making the world a better place so by all means, get caught up in them. But while the “G” in ESG is the last letter, it’s part of the acronym for a reason. At the end of the day, if you’re running a company, you owe it to yourself to make sure everything’s properly managed, that you have an attractive environment for current and potential employees and that you put the best foot forward for your shareholders and investors so that more will come flocking to your company when the time is right.
It took me a while to wrap my head around ESG scores. To be honest, a couple of months ago I didn’t even know they existed. But after taking some time to research the subject, I’m kind of amazed I didn’t know about it before. It’s a number that essentially shows you how well a company handles issues that we talk about every day. From greenhouse gas emissions to employee health, and business ethics. It’s a wonderful shorthand to show how well a company is doing within the larger scope of the Earth and all the people in it. And honestly? As one of those very tiny people on this planet, it’s nice to know that as I’m looking up at these monolithic titans of technology and industry, some of them are looking back down at me, showing me something that’s so much more than a number. It’s a symbol of how much they’re trying to use what they have to make everything just a little bit better.