Historically, businesses have prioritized profit-making and increasing revenue at the expense of any other thing. These business practices were based on shareholder primacy and the understanding that companies should address their shareholders’ concerns above all else. However, recently, businesses have begun changing their trends and practices to reflect that they serve not only the interest of their shareholders but also those of all their stakeholders and parties directly affected by their business practices.
These changing trends have magnified the place of all material factors affecting businesses in the decision-making process. These factors include environmental, social, and governance (ESG) tenets which pertain to the company.
The Place of ESG in Business
Businesses do not operate in a vacuum. They affect and are affected by different factors within the community they serve. As society continues to grow, the sustainability of businesses and the utilization of scarce resources play a significant part in advising the companies on what decisions to make. This is where ESG comes into play.
The Environmental element considers how businesses affect and are affected by the environment. Climate change concerns, carbon emissions, waste management, and natural resource allocation determine how companies engage in some of their practices.
The Social element of the ESG considers the relationship businesses have with the society in which it operates. Businesses factor in customer satisfaction, data management, labor standards, ethical practices, and diversity in their decision-making processes.
The Governance element applies to how businesses run. As such, in furtherance of the ESG agenda, companies incorporate suitable governance mechanisms and board practices. These include efficient accountability, audit structures, and a free and fair whistle-blower framework that permits information sharing and whistleblowing.
Factors Driving ESG Integration in 2022
1. Climate Change
The topmost factor affecting and driving ESG integration is climate change. While many people, mainly the far-right, are skeptical about climate change and its effects on modern society, scientists are constantly providing research alluding to climate change. Scientists have identified that global warming is primarily responsible for climate change. Since humans are directly responsible for most of the greenhouse gasses that increase global warming, companies that integrate eco-friendly practices and are environmentally adept have a higher likelihood of receiving investments from investors integrating ESG ideals in their decision-making.
2. Need for Efficient Organization Management
ESG integration entails the incorporation of ESG issues in investment analysis and decisions. As noted above, efficient governance is central in informing investors on which companies to send capital to. One way of identifying an efficiently managed organization is by considering the protocols for sharing information among stakeholders.
ESG Integration services facilitate efficient integration mechanisms as they allow all entities across an enterprise to ensure that the organization adheres to ESG compliance and risk management. Such a framework in an enterprise drives investors to companies as they appear to have an efficient ESG protocol.
3. Corporate Best Practices
While disclosure of ESG strategies and progress is not a requirement under the present framework on corporate governance, many companies have adopted disclosures that indicate a company’s position concerning ESG in the regular reports of the company. This is slowly becoming the best practice among corporate organizations and enterprises. Given this, investors will likely consider companies that give frequent disclosures on ESG awareness and strategies as viable investment options while those that shy away from such disclosures as risky ventures. This will increase the place of ESG integration in business practices.
4. Social Issues in The Community
The present consumer generation has developed a tendency to hold corporate entities accountable for their actions and those of their agents. Corporate entities that fail to meet the threshold of what constitutes social awareness run the risk of “canceling” by the community. As such, corporate entities must always be politically aware and correct to thrive in business. Investors will likely consider the social issues a corporate entity addresses when making investment decisions. This involves the social element of ESG integration and decision-making.
5. Diversity Issues
The place of diversity in the communities across the globe is likely to influence ESG integration, especially where investments are concerned. During the COVID-19 pandemic, various social issues such as race and social class came to light, illuminating the inherent differences among community members.
As such, awareness of diversity is on the rise. Thus, since ESG governance seeks to apply to the social impact of the company in the community, diversity will increase the place of ESG integration. Notably, organizations that incorporate diversity not only in their organizational structures but also in their advertising and social outreach programs are likely to attract funding from investors.
When a company assimilates ESG practices in its administration, it appreciates that it has a responsibility to its investors, stakeholders, and even inanimate objects such as the environment. As such, ESG integration will grow since many investors consider companies with such ideals likely to prosper in the long run.