Environmental, social, and governance (ESG) is the umbrella term referring to socially conscious ideation and sustainable practices that impact the world beyond the business itself. Many of society's problems we face today cannot be confronted without the participation of the private sector, explaining the spike in demand for corporate-sponsored ESG initiatives and resultant corporate response.
With ESG taking up more real estate in corporate strategy, it's important to recall why ESG matters.
At the forefront of any executive's mind is the value proposition: What business value does ESG bring to my company? Extensive research shows a positive correlation between ESG and profitability. Companies with diverse boards and female leadership report a greater net revenue margin than companies lacking diversity at the top. In a survey of nearly 13,000 enterprises across 70 countries, a majority reported that gender diversity initiatives led to a 10-15% increase in profits. In parallel with profit growth, inclusive policies are predicted to increase the ability to understand consumer demand by 37.9%, better company reputation by 57.8%, and promote innovation and creativity by 59.1%. ESG is shown to enhance business performance and outcomes in a multitude of ways, proving it valuable in the competitive business environment.
Generationally speaking, the younger workforce demands more purposeful work. They are generally more selective and desire a company with values that align with their own. Especially in today's employee market, business culture and company values hold greater weight than ever before. Employers that adjust accordingly have the ability to attract that talent, generate higher productivity and position themselves to retain talent. In fact, of the businesses that reported improved business outcomes in the survey, 56.8% reported an increased ability to attract and retain talent. In a struggling labor market, employers with ESG initiatives have a leg-up on competitors.
Regulatory reporting is on the horizon for businesses in the United States. Europe has already enacted ESG disclosure rules such as the Sustainable Finance Disclosure Regulation (SFDR) and recently, the U.S. Securities and Exchange Commission (SEC) announced that registrants must disclose certain climate-related risks and information, specifically about greenhouse gas emissions. The SEC also requires public companies to disclose certain KPIs that may influence investor decision-making and/or be necessary to the understanding of the registrant’s business. This includes ESG-related risks such as energy consumption and board diversity numbers. For instance, the SEC approved a Nasdaq rule requiring most Nasdaq-listed companies to have at least two diverse board directors; failure to do so requires explicit explanation. Growing regulatory interest in ESG signals the importance of ESG metrics and reporting.
After establishing a baseline understanding of ESG and its importance, the next step is accountability. Companies report ESG goals and metrics to satisfy stakeholders' expectations, including those requested by regulatory bodies, and maximize business value. For example, a company may report a percent reduction in its carbon footprint over time to show stakeholders that they are keeping on pace with pre-established company benchmarks, and/or to include it in their SEC filings. This is where our solution comes into play. To learn more about our ESG reporting solution with Workiva, access our demonstration video and one-pager.