Garon Agrawal
With more and more companies adopting ESG policies, why should it matter to the rest of us?
ESG or Environmental Social Governance refers to how a company impacts the environment, creates value for shareholders, and manages its employees to create profitability and sustainability in the long term.
ESG takes into account how the environment has been plagued with issues ranging from climate change, and natural resource scarcity, to pollution and waste and its effect on profitability. Climate change leads to an increase in natural disasters which destroy infrastructure leaving the businesses in affected areas suffering. Flooding in China hampers tourism causing flights to be canceled, local transportation to be paralyzed, and tourist attractions to be damaged. With global warming companies are left unprofitable and unlikely to receive additional investment from investors. Additionally, Climate change from unnecessary pollution and waste leads to the addition of unnecessary toxins that can harm people exposed to it. Air pollution is now the leading environmental risk to health. Companies that pollute the air become targets for riots and boycotts, losing public trust. This severely damages the public image resulting in a major loss of customers, profit, and potential investors. Natural resource scarcity also threatens profitability because the ability to produce products using materials such as lumber, metals, and minerals is threatened. Prediction believes natural resources could run out by 2050. Companies that are seen wasting these natural resources are less favorable by the public and investors. Environmental risks are detrimental to a company's ability to profit in the longer term.
Social factors also account for profit loss in the human resources, product safety, and human rights departments. Companies who value their employees and help them prosper in the workplace improve morale and efficiency. Employees who are more efficient end up bettering the company and helping them lead in a good direction. Also, Product recalls are very costly averaging 10 million dollars per recall. Recalls also severely damage a company's public image. If the product severely hurts people, trust in the company will be lost and investors won't see the company favorably. Human rights are a serious issue. Sadly, many companies exploit people for their benefit. When the public becomes aware of these companies' wrongdoings, boycotts, customer loss, and loss of trust will occur. In China, Nike was boycotted for their underpaid labor. Social issues severely impact a company's image and profitability.
Governance issues such as the lack of company diversity, company transparency, and ethical practices make a company less profitable. Companies with diverse employees and executives are often the most successful. When you have people coming from different backgrounds, they offer different perspectives opening the ability to have more options during decision-making. It's also important for companies to be transparent and honest about their reports. Stakeholders like to see credible numbers to better inform themselves before investing. Stakeholders also are turned away from companies with unethical business practices like underpaid labor, bad working conditions, and cutting corners on products.
ESG is detrimental to preserving the environment, creating good relationships with the community, and increasing profitability and a positive public image for companies. But, for the investor, ESG offers insight into whether a company can be profitable and sustainable for long-term investment.
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