ESG has become an increasingly popular buzzword among investors and corporate leaders. Pressures to further integrate sustainability and corporate social responsibility into the global economy are coming from all sides: legislators, media, and even consumers. But what does ESG really mean, and how is it affecting commercial business owners?
ESG: Behind the Acronym
ESG stands for “environmental, social, and governance,” a criteria describing the characteristics of a company that socially conscious investors are using to evaluate potential investments. The higher a company’s ESG score, the more attractive it is to investors.
Environmental criteria measure how a company interacts with its environment. This can include a company’s water usage, energy usage, waste management, contribution to air pollution or deforestation, or compliance to environmental regulations.
ESG scores increase for companies taking action to preserve the natural world. For example, using renewable energy resources to reduce a business’ carbon footprint or limiting use of toxic chemicals and materials.
Social criteria examine a company’s business relationships (i.e. employees, customers, supply chain partners) and its ethical practices. Human rights, product quality, and alignment with consumer trends are all areas of interest for ESG investors, as they contribute to a company’s perceived social value.
Companies prioritizing initiatives like diversity and inclusion, community involvement, and customer satisfaction rank higher on ESG scores, whereas companies facing labor strikes, consumer backlash, or other social volatilities are tell-tale signs of a risky investment.
Governance criteria pertain to a company’s internal structure of leadership, including executive pay, internal controls, and decision-making processes. For publicly traded companies, this also includes ensuring shareholder rights and avoiding conflicts of interest within the Board of Directors.
Investors want transparency and assurance that the companies they invest in not only comply with the law, but also practice strong governance policies to ensure long-term value. To show favorable governance attributes, many companies are encouraging board diversity, for instance, by adding more women to the board. Others are restructuring executive compensation.
Calculated by independent, third-party research firms, ESG metrics help investors identify the risks and opportunities when comparing potential investments (in addition to traditional financial analysis), though the focus on environment, social, and governance can hold varied weight between companies.
How the ‘E” in ESG Impacts the Bottom Line
While ESG performance reporting is becoming increasingly standardized for public companies, even private companies are grappling with consumer expectations for social and environmental compliance.
Fortunately, business leaders no longer have to choose between doing the right thing and doing what makes financial sense, and the technology and services offerings for addressing ESG mandates are only increasing. A recent McKinsey report shows that companies investing in ESG and sustainable practices experience increased capital gains, greater growth opportunities, and more balanced risk management. Companies focused on energy efficiency initiatives, a core environmental category, can also realize reductions in operating expenses by using solar energy to offset electricity costs.
Commercial properties unable to implement on-site solar now have promising options to invest in community solar projects, for example, to access the clean energy benefits for their business. New financing vehicles that encompass not just solar but a host of commercial property sustainability investments are coming to market as well, making it more affordable than ever to participate in ESG initiatives.
When weighing the capital and operational benefits of investing in asset improvements, it is important to also note the ancillary benefits to having commercial properties optimized for sustainability. It has been reported that 71 percent of global employees prefer working for environmentally sustainable companies, and more than half of the world’s consumers factor in a brand’s sustainable nature when purchasing products. Companies with higher ESG scores can more easily attract and retain top talent, contributing to higher employee productivity and profit. Gaining investor support also helps increase a company’s stock or initial public offering (IPO) price.
Combining all of the hard and soft benefits of investing in the environmental piece of ESG, it becomes clear to see the advantages for commercial property owners. In the end, they stand to benefit from ESG mandates and increased sustainability measures throughout the supply chain, as does society at large as well as the climate.
