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ESG: What on earth is it?
Discover why understanding ESG is vital for boardrooms, how it shapes Australia’s landscape, and its impact on risk, workforce, investor appeal, and regulatory compliance.
(Reading time approximately 10 minutes)
In our increasingly interconnected world, the importance of socially responsible and sustainable business practices is gaining more attention than ever before.
We have had close to 1000 Directors complete our Board Governance Review and Director Skills Matrix. The results around ESG continually indicate a need for development in the awareness and capabilities of those at the Boardroom table, to contribute and think strategically in this area.
When prompting further discussion, the most common question is "What on earth is ESG?".
What is ESG?
ESG stands for Environmental, Social, and Governance trends and issues. The handprints (Social) and the footprints (Environmental) of an organisation.
Environmental indicators look at how a company performs in the sustainability of our natural world. It may include waste management, energy use, consumerism, climate change mitigation and handling of extreme events.
Social indicators examine how a company manages relationships with its stakeholders: employees, suppliers, customers, and the communities, through its operations. They may look at issues such as workforce (retention and HR practices), cybersecurity, social inclusion and diversity, modern slavery, minority groups, gender equity, First Nations people and community development.
Australia is no stranger to the growing importance of ESG.
The country’s exposure to environmental risks, such as covid, bushfires and floods has amplified the need for organisations to consider environmental factors in their strategic planning.
Australia’s social issues, including the reconciliation with its First Nations people and ever growing cyber hacking crime, also play into the policies and strategies seen more and more by those at the boardroom table.
Why is ESG important for boards and organisations?
Risk Management: Being aware of, and understanding ESG trends and issues help companies identify potential risks that may arise from environmental damage, social issues, and poor governance. By proactively, strategically addressing these factors, organisations can mitigate these risks and secure their long-term sustainability.
Workforce: Understanding that staff are key stakeholders of an organisation and therefore, representing their voice, diversity, gender equity and inclusion is crucial. This starts at a board level. Reducing churn, increasing retention and building a strong work place culture, the handprint of an organisation is most strongly reflected through prioritising the voice of its staff, and its ability in not only implementing but encompassing ESG principles.
Investor Appeal: There is a growing trend of investors favouring businesses that uphold ESG principles. Companies demonstrating strategy, process and mission statements around these principles can potentially attract more investment, boosting their success.
Regulatory Compliance: With an increasing focus on sustainability, governments worldwide, including Australia, are introducing more stringent regulations related to environmental protection, social issues, and governance. By adopting ESG principles, organisations can ensure they stay ahead of regulatory changes and avoid penalties. Coming into 2024 we are seeing an increase in these mandatory requirements such as Climate Change and Modern Slavery.
Reputation and Stakeholder Engagement: Companies known for their commitment to ESG principles enhance their reputation, which lead to increased consumer loyalty, better relationships with stakeholders - including workforce, and overall business success. Reputation is more exposed than ever before, while also becoming more intrinsically tied to the integrity of how organisations embody ESG. This again ties back to investor appeal and the long term sustainability of the organisation.
What are the key questions we need to ask first?
As the world continues to change and evolve, so does the definition of good business practice. By developing ESG strategies and practices, boards and organisations in Australia can build sustainability while contributing positively to its community.
Things to initially consider:
- Do we know the Environmental, Social and and related Governance trends and issues (ESG) that are affecting our organisation?
- Do we discuss and strategise ways to manage these ESG trends and issues and prevent associated risks within the organisation?
- Are we proactive in our approaches and strategies in relation to ESG trends and issues and the contribution our organisation could be making externally? i.e., Reconciliation Action Plan, ethical supply chain partnerships (uniforms, equipment)
- Do we have a designated Board Subcommittee that has oversight of the risk factors and strategies in relation to ESG trends and issues?
- As a Board are we assured we are doing the right thing for our own workforce in relation to these ESG trends and issues, what do our organisation's retention and turnover rates reflect?