What is ESG? Definition, benefits and how to get started

With more attention to environmental, social and governance (ESG) issues, businesses must show their commitment to creating a better world. However, figuring out what’s required and what approaches to adopt can be challenging.

In this guide, you’ll learn about ESG and how it benefits your business. We’ll also share steps to help you implement an ESG strategy and improve performance.

What is ESG?

ESG, short for environmental, social and governance, is a set of standards that measure a business’s impact on the environment and society, as well as its ethics and transparency.

ESG criteria act as a management and analysis framework to help businesses, customers and investors evaluate a company’s health beyond profitability.

Understanding non-financial practices such as sustainability, community impact and workplace governance helps businesses operate responsibly. Tracking this side of the business can boost long-term financial performance and improve your reputation. It also reduces the risk of non-compliance with climate and sustainability regulations.

ESG’s impact covers three main areas.

1. Environmental

The environmental part of ESG measures your business’s impact on the environment. It also considers how you mitigate output to operate more sustainably.

Environmental best practices include:

• Switching to renewable energy sources and reducing carbon emissions

• Conserving water to reduce water waste and its impact on local communities

• Promoting recycling to reduce the amount of waste sent to landfills

• Using ethically sourced and manufactured products to promote supply chain sustainability

• Forming partnerships with local conservation charities to promote biodiversity and preserve habitats

2. Social

The social aspect of ESG looks at workplace culture, how you treat people and your business’s impact on the broader community.

Social best practices include:

• Ensuring fair pay for all employees

• Promoting diversity, equity and inclusion (DEI)

• Supporting human rights and fair work conditions across your supply chain

• Implementing robust workplace health and safety

• Ensuring data protection for employees and customers

• Keeping customer satisfaction levels high

• Investing in projects or charities that support the local community

3. Governance

Governance in ESG focuses on decision-making, ethics and transparency in your business operations.

It also examines how you manage compliance and adhere to regulations, including environmental and social policies.

Governance best practices include:

• Upholding high ethical standards (e.g., honesty, fairness, integrity and transparency)

• Implementing robust rules around conflicts of interest, lobbying and bribery

• Ensuring diversity in leadership teams, including fair and open board elections

• Keeping leaders accountable for risk and performance management

• Ensuring transparency in executive pay and bonuses

• Delivering open and accurate reports to stakeholders on ESG, financial performance and business strategies

Here are some important factors to measure for each area of ESG.

Measuring impact across these areas helps you run a business that benefits customers, stakeholders, investors and society.

ESG vs. corporate sustainability

Corporate sustainability and ESG are sometimes used interchangeably, but they’re distinct.

Corporate sustainability is running a business to meet economic, social and environmental needs in the present without compromising future generations. Think of it as a broad principle that promotes responsible and ethical business practices.

ESG is a subset of sustainability. Businesses, stakeholders and investors use it to measure company performance in environmental, social and governance factors.

For example, ESG metrics can help a company evaluate performance in specific areas, such as carbon emissions or executive pay, and make informed strategic or investment decisions.

On the other hand, sustainability is a concept that considers overall impact. Implementing (and complying with) an ESG strategy helps deliver long-term sustainability.

Why should your business consider ESG?

Growing awareness of ESG issues such as climate change, deforestation and human rights has inspired more businesses to make positive changes. Implementing an ESG strategy shows you’re taking accountability and responsibility for your actions. It also shows your commitment to creating a better world.

By running your business more sustainably, you can gain a competitive advantage and future-proof your business. Here are some benefits of adopting ESG.

Unlock investment opportunities

An effective ESG strategy is an attractive selling point if you want to grow with external investment. As governments increase regulations and targets around sustainability, the ESG investing (also known as socially responsible investing) market continues to grow.

Research by Capital Group shows that 89% of investors consider ESG factors. Additionally, a report by Morgan Stanley notes:

Investors consider various issues when evaluating investment strategies, so demonstrate how you protect long-term value across each area of ESG.

Attract more customers

Customers increasingly expect companies to be environmentally conscious. Meeting those expectations can help you win their business and their trust.

PWC research shows consumers are willing to pay more for sustainable products:

They are also more likely to choose a brand with ethical business practices that publicizes its environmental responsibility efforts.

A study by McKinsey and NielsenIQ found:

The study also found that sharing ESG efforts across products and categories helps convey authenticity and gives your company a better chance of achieving outsize growth.

Attract (and retain) talent

Just as customers choose brands based on the company’s ESG practices, prospective employees are more likely to join your company if you offer a working environment that prioritizes their needs.

A New Possible survey of workers’ wants found that unhealthy culture, poor leadership and pay dissatisfaction are the top reasons employees leave.

On the retention side, flexibility, good colleagues and a healthy culture are the top reasons they stay.

Fostering a positive culture, supporting employees and being transparent about pay can attract and retain high-performing staff. ESG best practices also give employees a sense of purpose, boosting motivation and productivity.

Reduce running costs

With the rising cost of goods and materials, using resources more efficiently can save money while reducing environmental impact.

For example, using more recycled materials, Nike prevented millions of pounds of waste from reaching landfills. The move also reduced spending on transport and waste disposal.

However, changes don’t always have to mean a massive overhaul of your operations. Small tweaks can have a significant impact.

Here are some simple ways to reduce running costs and improve your ESG impact:

• Switch to green energy sources (e.g., solar panels and LED bulbs)

• Automate lighting, heating and air conditioning controls

• Use lightweight recycled packaging or reduce packaging size to cut shipping costs

• Promote flexible working to use less office space

• Go paperless by digitizing documents, automating processes and using online tools

Maintain regulatory compliance

Implementing an ESG strategy promotes sustainable practices and keeps you accountable by adhering to climate change regulations such as:

• Low- and zero-emissions zones (LEZs)

• Clean Air Act

• Landfill fees

• Single-use plastic bans

• Clean Water Act

As you measure ESG performance, set clear goals to meet targets and avoid fines or damage to your reputation. Improve risk management by spotting potential threats proactively.

For example, buy carbon credits if your ESG report shows a need to lower your carbon footprint. This step demonstrates your commitment to carbon reduction and prevents negative brand perception.

6 steps to create and implement an ESG strategy

An ESG strategy is a plan of action to achieve your environmental, social and governance goals. It aligns stakeholders on objectives and shows potential investors your business is moving in the right direction.

Your ESG strategy depends on the size and complexity of your business and its resources. However, the process of creating and managing it is the same.

Here’s how to implement an effective ESG strategy.

1. Set up an ESG team

Managing ESG involves everything from overseeing environmental issues to communicating with stakeholders and ensuring regulatory compliance. In other words, it’s more work than one person can likely handle, even in a small business. It pays to have a dedicated team in place.

To meet objectives, your ESG team must collaborate closely with leaders and departments, including finance, legal and risk management. Therefore, diversity and wide-ranging expertise are essential.

The size of your team depends on your business, but should include the following:

• Chief Sustainability Officer (SCO) to oversee the ESG strategy and ensure successful implementation

• ESG strategists and analysts to develop initiatives in line with goals and track performance

• Compliance and risk managers to identify and mitigate risks while ensuring regulatory compliance

• Communications managers to publicize ESG initiatives and progress to stakeholders and customers

Look for employees passionate about sustainability across different departments, so you have a broad range of expertise.

Since this role is likely new to employees, prioritize training to enhance ESG knowledge. Encourage collaboration across departments so the team can learn from one another.

Here are some ESG courses to upskill your team:

• ESG Certification by Corporate Financial Institute (CFI)

• Coursera EFG courses

• ESG course by Cambridge Judge Business School

• Corporate ESG Training by Sustainalytics

• ESG Reporting (Certified Course) by EcoSkills

Consider outsourcing ESG functions to specialists. For example, hire an ESG data provider to collect, analyze and present relevant information on your ESG performance. This data allows you (and potential investors) to make informed decisions.

You could also bring in an ESG consultant to guide your strategy and give you ideas on how to improve. External experts can ensure effective implementation as you build your ESG team.

2. Analyze your business processes

Your business operations already impact the environment, employees, customers and your community. Understanding whether this impact is positive, neutral or negative can help you identify priority areas.

Look at your current performance across each area of ESG by reviewing:

• Product or service lifecycle across the supply chain

• Carbon emissions

• Water usage

• Waste policy

• Employee well-being and support

• Workplace diversity, equity and inclusion

• Board compensation

• Community relations

Use a materiality assessment to identify and prioritize your most relevant ESG topics. Engage stakeholders to learn which specific areas of ESG are essential.

For example, interview suppliers to learn more about their processes and identify areas to reduce waste or switch to renewable energy providers. Survey employees to analyze well-being and understand how to meet their needs.

Use the feedback you get to rank issues based on:

• How important they are to stakeholders

• Their potential impact on your organization (financial and legal risk)

The results will help you set meaningful goals for your ESG strategy. For example, your surveys might show carbon emissions are important to employees and customers who want to associate with eco-conscious businesses.

Listing carbon reduction as a priority ESG issue shows an intent to lower your carbon footprint, helping you increase retention. Acting on this issue will protect your reputation while preventing legal and financial problems such as fines and higher taxes.

3. Set achievable ESG goals

Goals are your roadmap for improving ESG practices. Use SMART (Specific, Measurable, Achievable, Relevant and Time-Bound) goals to provide direction and set a clear timeline for achieving your aims.

For example, Google’s goal is to reach net-zero emissions across all its operations and value chain by 2030.

To achieve this, it’s developed a strategy based on SMART goals:

• Reduce emissions across all operations (Scope 1, 2 and 3) by 2030

• Run on 24/7 carbon-free energy on every grid where it operates by 2030

• Replenish 120% of the freshwater volume it consumes by 2030

• Divert all food waste from landfill by 2025

• Make product packaging 100% plastic-free by 2025

Once you’re clear on what to achieve, set milestones to benchmark your performance and measure progress so employees stay motivated and on track.

Use key performance indicators (KPIs) to measure success. Say you aim to increase workplace diversity by 50% by 2027. You might track KPIs like the percentage of employees from minority groups or women in leadership roles.

Remember your goals should always be achievable. If a positive impact is hard to achieve with current resources, move from negative to neutral and build from there.

4. Integrate ESG into your company culture

Now that you have clear targets, make changes to work toward them. Get buy-in from everyone in the company. ESG initiatives require a shift in mindset and different approaches to work.

Here are a few ways to integrate ESG practices into your company and get on board:

• Educate employees on the importance of ESG and social responsibility and why it makes a difference

• Train them on how to apply ESG values to their roles

• Encourage business leaders and managers to demonstrate ESG best practices in their actions

• Recognize and reward employees for their efforts in promoting sustainability

• Hold regular discussions to encourage involvement and engagement

Implementing ESG best practices into operations will help build trust and strengthen your values. Over time, your actions will become core principles.

5. Report on your ESG progress

ESG reports are critical to understanding your ESG impact and showing stakeholders and investors your progress toward goals.

The contents of your report depend on your objectives. Here’s what you might focus on for different audiences:

• Investors. Financial performance, ESG progress and plans

• Employees. Staff engagement, benefits, workplace safety and well-being

• Customers. Ethical practices, product safety and customer satisfaction

• Regulators. Regulatory compliance and how you’re adhering to best practices

Use the ESG reporting framework to guide you on specific information to include. Summarize priorities and highlight accomplishments. Include metrics and KPIs across each area of ESG to show progress.

Avoid technical jargon and make it user-friendly, with bullet points, color and graphics to help readers digest the information.

For example, here’s how McKinsey uses attention-grabbing numbers to highlight sustainability in its 2023 ESG annual report:

Transparency is critical to ESG, so be open and honest when communicating performance. Stay accountable for areas that need improvement and outline how you plan to address them.

Transparent reporting will also help you avoid vague, misleading claims about your ESG efforts and prevent accusations of greenwashing (pretending to be environmentally friendly).

6. Audit your ESG strategy to improve impact

Review your strategy quarterly or annually (depending on goals) to determine what’s working and where improvements can be made.

Reviews help the ESG team:

• Track progress toward company objectives

• Keep initiatives in line with the latest industry regulations

• Gauge stakeholder commitment

• Identify gaps, risks and opportunities

Depending on the size and scope of your ESG efforts, you might focus on one area at a time (e.g., environmental impact, social impact or corporate governance).

Assess whether goals are relevant, measurable and actionable for each of your current initiatives and whether KPIs provide meaningful insights.

Next, assess your current ESG internal controls (e.g., procedures and practices) to ensure they fit your goals, suit employees and meet expectations.

Remember, ESG needs buy-in from everyone in the company. If staff struggle to understand or implement your strategy, you may need to make changes or provide more training.

Run a materiality assessment to determine if your strategy targets ESG issues that matter to you and your stakeholders.

Use your insights to update targets, adjust KPIs and implement new initiatives that keep you moving in the right direction.

Final thoughts

Improving ESG performance starts with understanding your company’s current impact and setting goals. From there, implement changes, report progress and follow regulations while keeping all stakeholders informed.

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