ESG: Will it improve your company?

New ESG requirements will affect almost every business as investors demand more transparency and government places new demands around these issues. ESG is an investor initiative to evaluate and price hidden risks within a business. Activists provide added energy behind the effort as they seek action on these issues. The federal government — through the U.S. Securities and Exchange Commission (SEC) — is in the process of imposing new rules to make ESG a part of the formal reporting process. Those demands will find their way down supply chains and other networks, creating new requirements for most organizations. Companies leaning into ESG will find pathways to make their organizations stronger.

ESG is an evolving and controversial investment approach to capture “nonaccounting” components for valuation. The letters stand for:

  • Environmental — environmental risks and how they are managed;
  • Social — core company values and how they are defined and put into action; and
  • Governance — accurate and transparent accounting, management, and investor practices.

Proponents view ESG as a way to evaluate risks and include these risks in company valuations. Opponents see ESG creating subjective and inconsistent evaluations that encourage outside intervention in inappropriate ways.

Regardless of these opinions, ESG will impact your business because influential investors and activists both want action. Investors will use ESG as a way to price “nonaccounting” risks to include these elements alongside traditional valuation methods. Activists are using the concepts to identify and confront companies for meaningful change. These are two strong forces pushing ESG forward — one for consistent reporting and the other for social accountability. Both forces caused the government to act, as the SEC is in the rulemaking process around ESG reporting.

These changes will affect your company. Larger companies will fall under the new SEC requirements and flow those reporting requirements through to their suppliers. New and more transparent reporting frameworks will bring accountability on these issues to the forefront. As it becomes easier to measure performance, more people will incorporate ESG into their individual decisions, from investors and funders to customers and employees.

Moving beyond the customer and government demands, you can use the ESG principles to make your company stronger. Our experience with manufacturers over the past decade shows that effective approaches to environmental issues reduce companies’ risk exposure and improves their bottom lines. Proactive, practical action on social issues can also make positive impacts on your company — opening recruiting to new and better talent pools and creating deeper employee engagement and a more effective workforce. Accurate and transparent accounting and management practices create stronger positions with a wider base of stakeholders, making the company more resilient.

Proactive companies will use ESG to strengthen their organizations and grow their bottom lines. These tools in expert hands can help leaders identify and quantify hidden risks affecting their futures. That can put your organization in position to address these threats with thoughtful action, rather than reacting to a crisis. These companies can also use ESG activities to set a course to become an employer of choice, improving retention and gaining access to the most talented people in the workforce.

Embracing ESG principles can also open new markets for your company. Larger companies will be looking for suppliers who can help them meet their objectives and deliver the products and services they need to survive. Manufacturers leaning into these new requirements will position themselves to take advantage of major trends and build their business.

It’s time to incorporate ESG into the way you run your company. Engage with experts who can help you align effective ESG actions with your business objectives. The right partnerships will demystify the evolving issues, position your organization to grow and find the talent needed for that growth, and strengthen performance to improve your bottom line.

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