A corporate entity has to make the right business decisions to boost return on investment. Besides financial factors, they also need to consider several non-financial ones. For example, when it comes to acquisitions, they need to first consider the environmental impact of the company they plan to acquire. The emergence of ESG research has completely changed the global business landscape. Corporates now consider factors such as greenhouse gas emissions, carbon footprint, energy consumption intensity, reusability and the use of forced labour before making a decision.
Understanding the ESG ideology
Environmental, social and corporate governance (ESG) factors are a group of non-financial factors that indicate the sustainability of a business. Well-informed customers now avoid patronising businesses that are detrimental to the environment or force their employees to work overtime. Organisations are now far more aware of their responsibilities towards their employees and the communities in which they operate.
A number of independent organisations rate companies on ESG factors. A high ESG rating indicates the sustainability of a business. Rating organisations use environmental factors such as water consumption intensity, hazardous waste production, recyclability, fossil fuel use and carbon footprint. The social factors they consider include use of forced labour and child labour, equal representation, equal remuneration and discrimination. Corporate governance-related factors include corruption, ethics and compliance with disclosure requirements.
Impact of ESG on global businesses
- Investment decisions
Global businesses previously focused only on financial matters when making corporate decisions. Now, they include ESG factors, as do individual stakeholders who consider a company’s ESG ratings before investing in it.
- Workplace changes
Companies have now started to recruit from diverse ethnicities, backgrounds, genders and colour to meet diversity standards. Legislation around gender parity and equal representation have made it mandatory for most international companies to have at least one female board member. Many enterprises have quotas for representation of indigenous groups, minorities and groups considered to be socially-backward.
- Business transparency
Stakeholders and investors now look for more information before they invest. This has resulted in businesses becoming more transparent, for example, by making their carbon emissions public.
- Changes in conducting due diligence
Companies and investors now consider ESG factors when conducting due diligence. With this increased focus on ESG considerations, global businesses are looking to outsource ESG research requirements to reliable third parties.