Your Complete Guide to ESG Policy: Everything You Need To Know
In 2016 alone, businesses managed $30.7 trillion in assets using an ESG policy. With sustainability and internal corruption concerns on the rise, these long-term, sustainable policies are more attractive than ever.
You may have questions, like what does ESG stand for, and what makes an effective ESG policy.
Keep reading to learn everything you could ever want to know about ESG standards and why you need to implement them in your business.
What Is ESG?
The ESG acronym stands for environmental, social, and governance. ESG standards are used to rate businesses on how well they monitor emissions, governance, human rights, and other factors.
There are several rating companies that let companies know how well their ESG policy is working. It’s important to know the differences between them.
MSCI uses 200 analysts and AI systems to assign businesses a rating on a scale from C to AAA.
Sustainalytics measures a company’s ESG risks, how management is dealing with them, and how effective their decisions are. It assigns a rating on a scale from 0 to 100 and creates a report noting any potential risks that haven’t been dealt with. It’s measured at least 11,000 companies using 40 different indicators so far.
The Morningstar Sustainability Rating uses the type of industry to determine the final score (i.e. industries with high environmental impact score worse). It’s been featured in over 50,000 funds since being introduced in 2016.
It’s important to understand the meaning of ESG ratings because every action your business takes affects them.
Several factors measure how well a business is doing in maintaining its ESG policies. Understanding them all is a critical part of creating a proper ESG policy.
The factors can be split up into three categories; environmental, social, and governance. Knowing them all helps you create an ESG policy that will net you a high rating and improve your impact on humanity and the environment.
Environmental factors relate to a business’s impact on the environment. Examples include:
- renewable energy usage
- waste management
- environmentally responsible policies (i.e. avoiding deforestation and building on protected areas)
Social factors relate to how a business treats the people it interacts with. This could be stakeholders, employees, or customers. Examples include:
- diversity and inclusion
- appropriate work conditions and labor standards
- community relationships
Governance factors relate to corporate policies and the way a company is run. They include:
- tax strategies
- company structure
- stakeholder relationships
- employee and CEO payments
Every factor matters, not only in determining a company’s overall ESG rating but in how they’re perceived by the public. Ignoring one aspect in favor of another can hurt your bottom line and reputation.
It’s also important that companies make clear communication a part of their ESG policies. They should let everyone know about anything they do that could affect environmental, social, or governance factors.
Comparing ESG to Other Policies
An increased concern for the environment has lead to a range of different methods for businesses to follow to regulate their impact. Part of understanding the meaning of ESG is learning how it differs from these other policies.
SRI stands for socially responsible investing and is similar to but not identical to ESG. SRI investors won’t invest in companies that don’t meet their ethical standards. While ESG ratings may impact an investor’s decisions, they may not be enough to eliminate an entire company from consideration.
Some ESG investments adjust based on a business’s ratings leading to lower expense ratios of 0.25%. Ethical investing requires a lot of research and can have much higher expense ratios of more than 1.5%.
CSR and ESG policies both focus on how sustainable a business’s practices are. The difference is that CSR focuses more on stakeholder relationships while ESG is about investors and capital markets.
ESG and impact investing aren’t the same, either. Investors choose companies with high ESG ratings to get higher returns. Impact investments are more about enacting changes that lead to better sustainability.
A business can choose whichever environmental policy they like, but an ESG policy is usually the best. It’s a more long-term solution, encourages more investors, and considers more aspects of the overall functioning of a business.
Why You Need an ESG Policy
You may not think that your business needs to consider ESG factors, especially if you’re not part of an industry with a high environmental impact like logging or fuel. There are several benefits to creating an effective ESG policy for every industry.
Several emerging trends make enacting an ESG policy more important than ever. They include increased climate change and mortality rates.
Developing an ESG policy is a long-term strategy for managing your business. It shows that you care more about the impact you have on the planet and the people who live on it than making a profit.
An ESG policy also increases your reputation and relationships. It attracts environmentally conscious employees and sends a message that you care to all potential stakeholders and customers.
The governance part of the ESG acronym is also an important thing to keep in mind, as it relates to the way your company is run overall. When handled properly, it can ensure your entire operation is efficient, socially responsible, and environmentally compliant.
A proper ESG policy can also impact your bottom line. Studies have found that companies with higher sustainability ratings had better stock returns.
Where to Learn More About ESG Policies
An ESG policy is a long-term, detailed way to ensure a business uses sustainable, responsible practices. It differs from other policies that measure similar factors.
ESG considers environmental, social, and governance factors. There are several rating companies, such as MSCI, Sustainalytics, and Morningstar, that let investors know how well a company is doing.
Maintaining a high ESG isn’t just good for the environment. It’s a long-term way to manage your business that shows everyone you care about how your business operations affect the rest of the world. This leads to a better reputation and a healthier bottom line.