What is ESG – and why does it matter so much?

Following my blog post exploring the four pillars of CSR, I wanted to dive a little deeper to look at ESG – something that’s often referred to interchangeably with CSR, but that actually has a slightly different focus.

So what is ESG, and how does it differ from CSR?

Environmental, Social and Governance (ESG) reporting uses key metrics to assess an organization’s sustainability. It’s gained huge traction in the U.S. over the last few years, with investors, employees and customers demanding more tangible evidence of an organization’s commitment to sustainability and ethical conduct.

While Corporate Social Responsibility (CSR) is about the internal strategies and initiatives that drive an organization to reduce harm and positively impact society, ESG provides the hard numbers and measurable impacts behind the efforts. So I look at ESG as a sustainability assessment that holds organizations accountable for their claims.

Which is more important than ever, in a corporate world where greenwashing is becoming increasingly widespread.

Let’s explore the three pillars of ESG and consider why they’re so important.

The three pillars of ESG

For an organization to have a strong ESG performance, it must evaluate lots of different factors across three categories – environmental impact, social responsibility and corporate governance.

• Environmental – evaluating the organization’s carbon footprint by assessing things like energy consumption, waste production and supply chain sustainability. This pillar measures how well the organization is fulfilling its environmental responsibilities, which form a core part of its CSR strategy.
• Social – evaluating the organization’s impact on its stakeholders, including employees, customers and the communities within which it operates. This pillar helps to build an understanding of how its practices affect people, in the broadest sense.
• Governance – evaluating how decisions are made and how transparently the organization is governed. This pillar explores areas like board composition, corporate policies, risk management and accountability.

How does ESG impact organizations?

According to the United Nations, governments and private sector organizations need to spend between $3 trillion and $5 trillion – over 6% of global GDP – per year to meet the Sustainable Development Goals by 2030. It’s big business.

So understanding the impacts of investing in ESG should be right at the top of the agenda.

We already know that CSR without ESG leaves the door wide open for greenwashing. But there are several other important ways that effective ESG performance can impact organizations.

1. Financial performance

Strong performance across the ESG pillars is shown to create value for organizations through both top-line growth and cost reduction. While this might seem counter-intuitive given the investments needed to meet ESG targets, the reason is pretty simple: When an organization’s ESG score improves, its capital costs go down and its valuation goes up, leading to increased investment. And the sharp increase in the number of investors channeling funds toward ESG-oriented organizations is certainly more than a short-term trend, with over half of investors saying they plan to continue increasing their ESG portfolio this year. From an investment perspective, organizations that have strong ESG metrics are better positioned for long-term growth, more resilient and less risky.

2. Employee engagement

It’s hard to ignore the connection between ESG performance and employee engagement. Some organizations have demonstrated increased employee engagement of up to 10 percentage points in staff members who participate in ESG activities, on top of impressive reductions in employee turnover. One of our latest reports found a concrete link between employee engagement and positive business results, so those 10 percentage points could make all the difference. A strong focus on CSR initiatives and ESG as a mechanism for measurement helps connect employees to the organization’s values and purpose, which is a key driver of engagement.

3. Employer brand

Lastly, prioritizing ESG plays a key role in enhancing your employer brand and helping to attract and retain top talent. It’s become a hot topic in the employer branding world in recent years – and for good reason. Potential future employees want to see a socially responsible organization that is committed to having a positive impact on society. In fact, almost all Gen Zs and millennials say they are seeking purpose-driven work and would be happy to walk away from a job opportunity at an organization that didn’t align with their values.

We’re on a mission to make the world a better place to work, and our Social Value Strategy acts as a framework in becoming a more socially responsible and sustainable business, so that we can help to create a better world for everyone. Come and say hello to our team of employee engagement experts to find out how we can support your CSR strategy and ESG goals.