Environmental, social, and governance (ESG) factors have become essential considerations for organisations and their boards, regardless of corporate structure or ownership. While ESG originated with publicly traded firms, its principles have growing implications for private companies and not-for-profits as well.
ESG refers to three central non-financial factors when evaluating the broader impacts of an organisation’s operations beyond purely financial returns. These include:
Environmental - How the organisation affects the natural environment through impacts like resource usage, emissions, waste, conservation, and stewardship.
Social - How the organisation manages relationships with employees, suppliers, customers, communities, and society through its labor, human rights, consumer, and community impact.
Governance - How the organisation abides by ethics, accountability, transparency, regulations, risk management, controls, and leadership structure.
While specific ESG priorities differ across industries, regions, and business models, the overarching purpose is assessing and disclosing how sustainably and responsibly an organisation operates.
ESG in Public Companies
For public companies, ESG performance is important for managing risks, attracting capital, aligning with societal expectations, and creating long-term value for shareholders. Robust ESG programs provide competitive and financial advantages that benefit both companies and their investors.
ESG in Private Companies
Private companies have less external pressure but can still gain substantially from strong ESG management even without public disclosures. The same logic applies in terms of reducing risks, controlling costs, attracting talent, improving processes, and planning for the future. For example, minimising environmental impacts lowers energy and waste expenses. Ethical business practices reduce litigation risks. Diverse and inclusive hiring improves retention. Strict quality control and cybersecurity controls prevent costly problems.
ESG in Family-Owned Enterprises
For family-owned enterprises, ESG helps sustain multi-generational success. For private equity portfolio companies, ESG improves prospects for eventual exit. While private firms may not publish comprehensive reports, tracking ESG performance enables strategic management. Those considering eventual IPOs can prepare ESG programs well in advance.
ESG in Not-for-Profits
For not-for-profits, ESG principles align closely with philanthropic missions. As with for-profit firms, managing ESG factors allows them to walk the talk as ethical and sustainable organisations. ESG programs enable not-for-profits to:
- Minimise overhead costs through environmental efficiencies
- Embody fair labor practices that reflect their values
- Maintain reputations via sound ethics and good governance
- Attract passionate talent committed to their causes
- Build trust and loyalty among individual and institutional donors
- Collaborate with corporate partners on societal impact
While not-for-profits may not have shareholders, they do have stakeholders such as employees, volunteers, donors, partners, and communities. ESG programs demonstrate good stewardship of resources and effective pursuit of social missions.
Across all organisational types, board oversight of ESG is crucial for executing sustainable long-term strategies. Boards can enact ESG-related policies, set goals, tie executive compensation to ESG targets, appoint directors with expertise in ESG-related risks and opportunities, and ensure ethical compliance.
Even without mandated public disclosures, boards should prioritise ESG factors given their linkages to societal wellbeing, operational resilience, reputation, and organisational durability.
To implement a robust ESG program, boards should:
Assess the organisation’s complete environmental footprint across all facilities, transportation, supply chains, and product lifecycles. Monitor impact reduction goals related to energy, water, waste, materials, biodiversity, and pollution.
Evaluate employee relations, diversity, equity, inclusion, compensation, benefits, training, health, safety, and wellness. Guarantee ethical workplace cultures, human rights protections, and engagement initiatives.
Institute and amplify ethics policies on issues like conflicts of interest, anti-corruption, privacy, accountability, whistleblowing, political lobbying, and risk management.
Ensure quality control, data security, transparency, fiscal discipline, and compliance with all legal and regulatory obligations.
Incentivise executives to prioritise ESG objectives via performance metrics and compensation structures. Appoint board members with multidisciplinary expertise in ESG-related risks and opportunities.
Discuss ESG as a regular board meeting agenda item. Create a dedicated committee to oversee ESG programs and performance. Provide ESG training and continuing education for all directors.
While ESG programs may require resource investments, the long-term payoffs can be substantial if executed strategically.
Beyond fulfilling social responsibilities, ESG strengthens operational resilience, culture, reputation, competitiveness, risk management, and access to capital.
In an increasingly transparent world, ESG provides an invaluable framework for boards and executives to ensure their organisations sustainably deliver value to all stakeholders.
What does ESG mean in Australia?
In the Australian context, ESG refers to how companies manage and disclose their performance related to environmental stewardship, social impacts, and governance practices (this is essentially the same in all countries not just Australia).
Key issues include climate change, energy efficiency, workplace relations, diversity, ethics, accountability and more. ESG originated with socially responsible investment but is now widely embraced in Australia by investors, companies, regulators and advisors to assess corporate sustainability, ethics and long-term value creation.
Where did the term ESG come from?
The term ESG traces back to a 2004 study published by the United Nations with twenty financial institutions called 'Who Cares Wins'. It outlined the investment case for considering environmental, social and governance factors, arguing that these issues posed risks and opportunities that impact financial performance. Principles for Responsible Investment advocate incorporating ESG into analysis.
ESG gained further momentum during the 2008 financial crisis as investors realised risks were not being adequately captured by traditional financial metrics alone. ESG provided a framework to more comprehensively evaluate the full spectrum of stakeholder impacts, ethical behaviour and enterprise risks facing organisations.
What is an ESG checklist?
An ESG checklist is a list of key environmental, social and governance factors that investors, companies or advisors can use to objectively evaluate, benchmark and report on a company's responsible business practices, impacts and ethical standing.
Checklists help standardise measurement and reporting on ESG performance. Sample criteria may include greenhouse gas emissions, renewable energy use, waste management, water conservation, employee relations, diversity and inclusion, human rights, consumer privacy, executive pay equity, anti-corruption practices, board independence and shareholder rights.
The checklist allows assessing both compliance with norms and comparison between organisations.
What is the difference between ESG and sustainability?
Sustainability specifically focuses on environmental impacts and resource usage like emissions, energy, water, waste and conservation. It aims to ensure companies durably balance ecological and economic needs. ESG encompasses sustainability along with additional factors like workplace relations, human rights, consumer welfare, ethics and governance. So while sustainability lives within the “E” of ESG, ESG provides a more holistic framework for evaluating how responsibly and ethically a company operates overall. However, sustainability and ESG are complementary concepts that both prioritise long-term value to all stakeholders.
Why is ESG controversial?
Some argue that ESG factors politicise investing rather than focusing strictly on financial returns. They contend ESG metrics are subjective, not material to valuations and beholden to special interests. Critics also argue that pursing social or environmental goals falls outside the scope of a corporation's duty to shareholders.
However, proponents counter that ESG helps identify risks, future-proof against disruption, attract talent and protect reputation, which ultimately benefits shareholders. They argue that corporate social responsibility leads to sustainable long-term value creation.
Climate Risk Governance – The Role of the Board
Decoding the Ethical Framework
Integrating ESG into Not-for-Profits: Managing Risks and Opportunities
Disaster and Crisis: Dilemmas and Challenges for Boards
Why Good Boards Behave Badly - Improving Your Board’s Performance Through Best Practice Boardroom Behaviours