What is ESG and Why is it Important?

Georgie Edwards

Associate Director

Graeme Hadley

Associate Director

Table of Contents

• What is ESG?
• Why Is ESG important?
• What is ESG Reporting?
• What are ESG Reporting Standards?
• Setting an ESG strategy
• Incorporating ESG

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ESG (Environmental, Social, and Governance) has become crucial as investors and stakeholders are considering non-financial factors in their decisions. ESG factors help assess a company’s sustainability and ethical impact, influencing long-term success and reputation.

Recent reports go so far as to suggest ESG issues are driving the biggest changes to financial reporting and disclosure standards in a generation.  

We caught up with two of our experts, Georgie Edwards and Graeme Hadley, who have helped many companies to look at why ESG is important, what frameworks and reporting options there are and develop impactful strategies which integrate  ESG into core business strategy with the aim of acheiving sustainable performance.

What is ESG? 

Let’s start with the basics. What is ESG?

Georgie: ESG stands for Environmental, Social, and Governance. The concept evaluates the ethical impact, risk management practices and sustainability of investments and companies, and is increasingly used to help determine their future financial performance.  

1. Environmental: How an organisation interacts with the natural environment, and vice versa.. It encompasses factors such as resource usage, pollution, climate change, waste management, energy efficiency, and biodiversity impacts.
2. Social: The social aspect of ESG covers how an organisation looks after its staff, its customers and the communities in which it operates. It involves evaluating factors such as labour practices, employee relations, diversity, equity and inclusion, community engagement, customer satisfaction, and human rights.  
3. Governance: These are the systems and structures that guide a company’s operations and decision-making processes. This includes board business model resilience, business ethics (e.g. board composition, executive compensation, shareholder rights, transparency), climate-related risks, competitive behaviour, risk management and management of the legal and regulatory environment.  

When we talk about sustainability, we refer to the long-term viability of systems. For businesses, this includes taking into account its environmental, social and economic impacts. ESG should be seen as a framework for evaluating a company’s performance and behaviour across environmental, social and governance areas. Critically, these three areas are heavily interconnected and should be managed in ways to support and accelerate one another.

Why is ESG Important?

Graeme, you have been working with companies to improve their ESG performance for over 10 years. Tell us, why is ESG so important? 

Graeme: The academic answer is that ESG is important because it helps organisations identify and manage risks, improve social responsibility, enhance long-term sustainability. It’s about meeting stakeholder expectations, navigating and complying with regulations, and improve access to capital. But there are so many ways in which environmental, social and governance-related issues show up in a business.

Take one of our clients, a major food brand needed us to identify and assess the ESG risks impacting the value chain of one of their food categories. This assessment helped them evaluate the potential level of financial damage that could be sustained by the food category, be it revenues, market value. It’s a risk that the client needed to track and integrate into their corporate risk register as it would have a material impact on their business and bottom line.

ESG is not just about mitigating potential risks. By having a proactive approach to managing your environmental, social and governance-related challenges, you can consider where and how to make improvements or innovate to remedy potentially costly or wasteful processes. This type of work demonstrates good operational efficacy and can attract investors, reduce the costs associated with access to capital, and, if communicated effectively to the right audiences, improve a company’s reputation. 

What is ESG Reporting?

That’s a neat segway into how companies can communicate their ESG efforts. Graeme, what is the purpose of ESG reporting and what does it include?

Graeme: An ESG report provides stakeholders with relevant and reliable information about an organisation’s environmental, social, and governance performance, including its risks, and opportunities. Standardised reporting frameworks enable stakeholders to make informed decisions based on standardised metrics and disclosures, promoting transparency, accountability, and comparability.  

ESG Reporting Factors

ESG reporting typically includes quantitative and qualitative data on a range of topics. That might be:

• Environmental – greenhouse gas emissions, energy consumption, and water usage
• Social – diversity and inclusion metrics, labour practices and community engagement
• Governance – board composition, executive compensation, and ethical conduct

Leading companies typically share ESG data via standalone sustainability reports, but are increasingly expected to integratematerial ESG information into annual reports to meet regulatory requirements. Given the investment into these reports, the most effective companies ensure that they use their ESG data to communicate with their various stakeholders, to either gain traction for more investment in ESG workstreams, or to encourage behaviour change that can drive greater performance in their ESG Key Performance Indicators.

ESG Reporting Frameworks

Georgie, Graeme talked about ESG frameworks. Can you tell us about the most common ESG reporting frameworks and standards that companies need to know about? 

There are a variety of ESG frameworks that companies choose to report to. These standardised guidelines provide companies with a structured approach to assess, measure, and report their ESG performance and help companies identify and disclose relevant information on their most material ESG topics, allowing for comparability and consistency in reporting across different organisations.  In an increasing number of  jurisdictions, there are regulatory sustainability standards that organisations may be required to report in align with such as the IFRS and EU’s CSRD.

Common reporting frameworks include: 

• The Global Reporting Initiative (GRI): As one of the most widely used ESG reporting frameworks, GRI provides a comprehensive set of indicators and reporting principles to guide organisations in reporting their sustainability performance. 
• The Sustainability Accounting Standards Board (SASB): SASB develops industry-specific sustainability accounting standards, enabling companies to identify, manage, and communicate financially material sustainability information to investors. These standards focus on environmental, social, and governance factors relevant to specific industries, helping companies determine which topics are most material to their industry.   
• The International Sustainability Standards Board (ISSB): is an organisation established under the oversight of the IFRS Foundation. Following strong market demand, the ISSB’s objective is to develop standards that ensure a global baseline of sustainability disclosures which align with the needs of investors and financial markets. These standards aim to enhance transparency, comparability, which is hoped will enable sustainability to play an more significant role in investment decision-making. ISSB has now released its first two inaugural standards – IFRS S1 and IFRS S2.  These have been adopted into legislation in a number of jurisdictions.
• The Task Force on Climate-related Financial Disclosures (TCFD): TCFD focuses specifically on climate-related risks and opportunities. It provides recommendations for disclosing climate-related information, helping companies assess and disclose the potential financial impacts of climate change on their business. Importantly, the IFRS Foundation has now assumed responsibility for the TCFD, whose recommendations are already used by thousands of organisations across the world for reporting on climate-related risks and opportunities. Companies applying IFRS S1 and S2 will meet the TCFD recommendations since they are fully incorporated into the ISSB’s Standards.
• The United Nations Sustainable Development Goals (SDGs): The SDGs are a set of 17 goals adopted by the United Nations to address global challenges. Many companies align their ESG efforts with these goals and report their contributions towards achieving them. 
• The European Sustainability Reporting Standards (ESRS): The ESRS are a set of reporting standards that must be used to meet the requirements of the EU Corporate Sustainability Reporting Directive (CSRD). The introduction of the CSRD marks a significant shift in requirements for companies to report material, standardised sustainability-related information alongside financial information, and to the same degree of rigour.

Setting an ESG Strategy

Graeme, from your experience, what are the main factors a company should consider in an ESG strategy? 

I always start by asking clients to consider their business strategy. How does your company’s plan for growth and performance align with the needs to manage and mitigate your environmental and social impacts? Look for the opportunities where you are having a positive impact in the world – how you can dial this up to be a core tenant of how the business performs? However, for those tasked with developing a new ESG strategy, or refreshing existing one, here’s my check-list of eight things that will steer you towards an an effective ESG strategy:  

1. Materiality: Identify the ESG issues that are most relevant and impactful to your industry, business operations, and relevant stakeholders. This list may be long, and you should go through a process to prioritise the risks and opportunities that have a significant influence on financial performance, as well as the notable impacts your organisation has on society and the planet.
2. Stakeholder Engagement: Engage early with your key stakeholders, including investors, employees, customers, communities, and regulators. These are the people that will support and drive the aims and outcomes of your strategy. Seek their input early and often, understand their expectations, and involve them in the development and implementation of your ESG strategy. Regularly communicate and provide updates on your progress to build trust and transparency. 
3. Goal Setting: Establish clear and measurable short- and long-term goals and targets aligned with your organisation’s overall mission and strategic priorities. These goals should be ambitious yet achievable, allowing you to track progress and demonstrate improvement over time. The key is to have a series of smaller goals that added together, show attainment of the main overarching goal.
4. Indicators, Metrics and Data Collection: Define what progression and success looks like. You will either need to select and/or develop appropriate indicators, metrics and data collection mechanisms to monitor and measure your ESG performance across your material topics, selected in the steps above.  
5. Integration: You must ensure you integrate ESG considerations into your core business operations, decision-making processes, and risk management strategies. ESG strategies can rarely be achieved in isoloation so by embedding sustainability actions across departments and functions, you can ensure accountability for the ESG outcomes you are striving towards and that ESG factors are considered as part of day-to-day decision-making. 
6. Transparency: Transparency is essential as it involves providing clear and comprehensive information about your organisation’s sustainability efforts, performance, and impacts. Transparent reporting helps stakeholders understand the company’s ESG practices, goals, and progress, fostering trust, accountability, and informed decision-making and helps avoid claims of greenwashing. 
7. Reporting: Use recognised frameworks or standards such as those mentioned above, to guide your reporting and ensure consistency and comparability. Regularly report on your ESG initiatives, progress, and impacts to relevant stakeholders. 
8. Continuous Improvement: Continuously review and enhance your ESG strategy based on evolving best practices, emerging trends, and stakeholder feedback. Regularly assess risks and opportunities, update targets, and adapt your approach to address new challenges and opportunities. 

Incorporating ESG into your Operations

Georgie, how do you recommend that companies incorporate ESG into their business?

By considering and implementing the above factors, you can begin to develop a comprehensive and robust ESG strategy that aligns with your business objectives, meets stakeholder expectations, and contributes to long-term sustainability and success. 

Begin by assessing your current practices and developing a clear ESG strategy aligned with your objectives and appropriate business ambition. Engage stakeholders and communicate your commitment. Implement sustainable practices, promote diversity, and monitor performance. Foster a culture of sustainability and seek external collaborations for expertise. By following these steps, your business can effectively integrate ESG principles and drive positive impact. 

You must keep in mind from the outset – incorporating an ESG strategy into your business involves a holistic approach and buy-in throughout your stakeholder network.   

Some companies may also consider implementing a specific organisation-wide change management project to ensure success. Effective change management involves a systematic approach to dealing with organisational change. In this case, the transition from traditional business-as-usual carbon-intensive business operations to more sustainable practices.

Want to progress but need help with your ESG strategy? 

We work with organisations across all stages of the sustainability and ESG journey from assessing material issues to developing and implementing ESG strategies and writing world-class sustainability reports. Reach out to our team if you need guidance.