The term ESG stands for environmental, social, and governance factors. This refers to the company’s impact on society and its long-term sustainability. ESG is a way to measure the impact of a company’s activities on its stakeholders. Companies are now being required to consider these issues when making decisions.
ESG has become a key factor for investors. The main purpose of ESG analysis is to determine whether a company is good at managing risks related to its environment, employees, customers, suppliers, community, and shareholders.
Companies should integrate ESG into their decision-making processes to ensure sustainable growth and profits. In addition, they should develop a strategy to achieve these goals. So, what is ESG integration?
What is ESG Integration?
An ESG integration is a way to measure a company’s performance against its ESG criteria. It helps companies evaluate their performance and identify areas where they can improve. In other words, the systematic incorporation of ESG when analyzing investments and making decisions is what is ESG integration.
ESG integration considers all material factors and their impact on investment analysis. However, it doesn’t prohibit different sectors or companies from investing. But an ESG integration is important for your business.
Why Should Your Company Consider ESG Integration?
1. Makes your Company a Choice Investment
A company that considers itself ESG must provide enough information to potential investors to support this claim. Minimum disclosure means the company should summarize its ESG claim in a few sentences, stating how it integrates ESG factors into the investment selection process.
Companies with an ESG integration show long-term improvement and resilience in their performance. When a company can show that it doesn’t violate international treaties like labor law or human rights, it is a great investment opportunity for investors. This is because investors don’t want to be associated with inevitable financial or reputational risks where there are poor ESG practices.
ESG integration helps a company identify the material factors of its corporate and investment performance and integrates them. Once an ESG issue is considered material, an impact assessment is done. However, an impact assessment is not done if an ESG issue is considered immaterial.
A materiality assessment requires companies to understand the key ESG factors affecting their sector or country. This information is available on the internet, ESG researchers, company reports, and filings, among others. A company can periodically review its ESG list and update or change the materiality of different ESG issues through this assessment.
3. Talent retention
A company with a strong ESG integration attracts and retains loyal employees. It helps them feel valued and motivates them to work with passion. In return, the company generates intangible goodwill that boosts its employees’ productivity and strengthens its brand.
4. Value increment
An ESG integration helps businesses identify the competitive socio-economic and environmental activities that can increase their value. Once it identifies these activities, it can discover growth opportunities and deal with emerging competitive obstacles.
Shortcomings of ESG Integration
1. Overemphasis on ESG factors
An ESG integration can cause the overemphasis of ESG factors in investment decisions. However, ESG factors are secondary in a company’s investment decisions, and overemphasis can cause a company to overlook the primary factors. This calls for stringent disclosure requirements to limit the company’s ESG information.
2. Difficulty choosing ESG issues
An ESG integration framework varies between companies. As such, one company’s issues may not be as important as another company’s. For instance, a company may cause pollution and damage to the environment but proactively promotes fair compensation, observes women’s rights, and promotes diversity. According to its manager, such a company has a great portfolio, but clients may be left wanting more.
3. It is tough on your financial advisor
A lot of investors are asking for ESG-compliant companies. Therefore, most companies feel the need to comply with these demands. However, the important thing to follow is the company’s self-reported data. It is tough for financial advisors to screen a company’s stocks for specific ESG factors.
Once you understand ESG integration, you will find that it is not a one-size-fits-all approach. Instead, every company needs to do its own assessment and create its own ESG framework. Nevertheless, ESG integration is vital for identifying potential advancements across a company’s investment activities. The bottom line is that ESG integration is a starting point but shouldn’t end there.