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The Impact of an ESG Policy: How to Get Started

May 1, 2024

In turbulent economic times, businesses often resort to tried-and-true short-term tactics to safeguard against potential losses. However, even as you realign resources and streamline budgets, it’s prudent to consider a long-term risk management approach. Environmental, social, and governance (ESG) risks are becoming top priorities for employees, investors, and other key stakeholders. Developing a robust and clear ESG strategy addresses these growing concerns and enhances your company’s capacity to mitigate risks effectively, serving as a crucial component in your overall risk management framework.

Why Do ESG Policies Matter?

One powerful reason your company should have an ESG policy is that it gives you a recruiting edge, especially with millennials and Generation Z recruits. More and more, employees want the values of their employer to align with their own. Purpose-minded recruits seek out a potential employer’s ESG reporting and come to the interview prepared to dig deeper. They ask questions about how the company minimizes climate change impact (e.g., Do you recycle toner? How do you participate in Earth Day?) and how you’re working to promote diversity, equity, and inclusion in the workplace. If you already have an ESG policy, your interviewers won’t be caught flat-footed by such questions.

ESG should matter to any company seeking outside capital, given that environmental, social, and corporate governance factors are driving more and more asset management and investment decisions. Long before BlackRock CEO Larry Fink declared “climate risk is investment risk,” the United Nations launched its Principles for Responsible Investment (PRI). More than 5,000 asset managers, institutional investors, and service providers have signed the UN PRI. These signatories attest that they believe ESG issues can affect the performance of investment portfolios and will incorporate these issues into investment analysis and decision-making processes.

How ESG Maps to Business Value

The ESG movement isn’t just about mitigating downside risk. ESG-focused investors know that focusing on these critical issues can lead to greater revenue and profits. McKinsey & Company has found that ESG can boost enterprise value in five ways:

  1. Top-line growth from better-targeted products and services, as well as better access to approvals and licenses awarded by governing authorities.
  2. Cost reductions from the efficient use of raw materials and natural resources. (McKinsey research shows that operating expenses can affect operating profits by as much as 60%.)
  3. Lower regulatory risk, given that regulators tend to look more favorably upon companies with a clear ESG strategy. (Typically, one-third of corporate profits are at risk from state intervention, according to McKinsey research.)
  4. Attracting and retaining employees. Employees who feel the business’s purpose matches theirs are more engaged, more motivated, and (as a result) more productive.
  5. Smart capital allocation. If you knew a potential acquisition was saddled with an environmental issue that would require millions of dollars in cleanup and remediation, would you take that deal? A company with an effective ESG strategy is more likely to ask the targeted questions to avoid such a disastrous investment.

Bottom line: If your sights are set on long-term expansion and profitable growth, invest today in the development of a clear and concise ESG policy.

Putting ESG Policy Into Practice

How can your company demonstrate its commitment to ESG issues, and how can you hold your company accountable for its ESG goals? As with any other business priority, policy management is where the rubber hits the road.

There is no blanket approach for developing an ESG policy. Each company must start with an honest, and often difficult, look inward.

Assessing ESG risks. In what ways are your current business operations negatively impacting the environment? A serious risk for an oil and gas company would be the practice of burning off natural gas using flares, which release carbon dioxide into the atmosphere. Consider the potential consequences of continuing that practice compared with the costs and benefits of alternative approaches. The assessment should also include what your company is doing to alleviate environmental issues. For example, an agricultural producer might use only recycled water in its irrigation systems, or it might have a program that diverts food waste from landfills.

Mapping priorities to mission. Once you’re equipped with an understanding of your strengths and weaknesses, it’s time to set goals. Choose a few — no more than five — priority initiatives that map to your mission and vision. For a community bank, equitable access to capital is a natural fit. A commitment to healthy food for all, a worthy goal for any organization, is particularly well aligned with an agricultural producer’s business model.

Managing policies and procedures. To move from organizational priority to common business practice, you need policies and procedures to help people change their behavior. It’s one thing to say that you have environmentally sound practices. It’s quite another to have policies in place for the proper disposal of contaminants — and repercussions for those who do not comply.

ESG Is Not a Fad

The ESG movement is not going away. A clear ESG policy will better position your company to attract employees and investors for the long term — and it’s a must if you’re considering taking your company public, thanks to the SEC’s proposed rule regarding climate-related risks.

Is your company working to put in place or update an ESG policy? Reach out to your CRI advisor for help assessing your organization’s unique environmental, social, and corporate governance issues.

 

 

 

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