Incorporating ESG into your business

Helen Mather, Partner

Environmental, Social and Governance (ESG) issues are now leading considerations in the business world and wider society alike. ESG (also known as Corporate Social Responsibility (CSR)) refers to a business’s behaviour and its impact on society and the planet. The legal and regulatory landscape is changing and the pressure to focus on ESG has exponentially grown, particularly in the last couple of years.

What is ESG?

ESG’s three central elements are:

1. Environmental: how a business deals with environmental challenges such as water usage and waste production and its impact on the environment around it.
2. Social: how the business treats customers, workers, other stakeholders and the wider community.
3. Governance: shareholder and board governance including issues such as executive compensation, equality and anti-corruption.

ESG is good for business

While the traditional focus of most businesses is to create profit for their shareholders, having a positive impact on the world while measuring and reporting on the businesses performance in areas such as fair trade, poverty, the environment, human rights, philanthropy and transparency is becoming increasingly important. Reasons for this include:

• It’s the law: ESG matters are increasingly incorporated into legal requirements that businesses must comply with, including pay gap reporting and ensuring that supply chains are slavery free. Whilst many legal requirements are relevant only for publicly listed companies or larger organisations, many apply to all businesses including anti-bribery laws and the legal requirement for company directors to act in the way that would promote the success of the company for the benefit of its members as a whole and in doing so to have regard to other factors, including other “stakeholder” groups (for example, employees, suppliers, customers and others) and the long term consequences of their decisions.
• ESG conscious stakeholders: ESG conscious stakeholders such as consumers or potential employees are increasingly more likely to evaluate ESG credentials to decide if they want to work with a business.
• Financial rewards: a business may protect and increase its value by associating their brand with ESG initiatives and cultivating an ESG-conscious working culture, giving it a competitive edge in attracting both new customers and a talented and committed workforce.
• Attracting investment: ESG factors are becoming significantly more important to investment decisions. Institutional investors are subject to the UK Stewardship Code of good practice which now has a greater focus on ESG matters (including climate change) than ever before. Institutional investors are also increasingly expecting companies to take a proactive approach to ESG initiatives in order to secure investment.

Incorporating ESG into your business

While many small businesses already engage positively with the community and its stakeholders, you can improve your ESG credentials by:

• Incorporating ESG practices into your business: both legally required policies and procedures and those that the business chooses to implement.
• Implementing an ESG strategy: a defined ESG plan setting out core values, objectives and how these will be incorporated into the businesses’ day-to-day operations is a tangible way to prioritise and monitor ESG objectives and hold the business to account.
• Employee engagement: “buy-in” from the workforce and ambassadors for the ESG strategy will be crucial to its success. Effective communication to and training of employees will be key to achieving employee engagement.
• Reporting: ensuring ESG achievements are communicated to stakeholders can be achieved in a variety of ways ranging from a dedicated page on the website to detailed published reports that could be independently verified by experts.

Kuits can guide you through ESG legal obligations and processes applicable to your business or an investment process being undertaken by your business. If you would like to know more, please contact a member of the team on 0161 832 3434.