Why ESG Matters

 ESG is a term covering the inter-relationship between a business and the stakeholders, communities, and broader environment in which it operates. The term covers a wide range of business policies and practices, including:

• Environmental impacts, driven by the widespread acceptance of climate change and the urgent need to act to limit the severity of climate change. This is the primary reason for the rapid rise in relative importance of ESG in the eyes of regulators, consumers, and investors and, as a result, corporate executives and boards.

• The Social impacts of a business that have come into sharp focus in recent years. Movements like Black Lives Matter and #MeToo have highlighted the role companies have to play in promoting diversity, equality and inclusion, while ensuring that fair labour conditions and living wages are provided within the organisation and the wider supply chain.

• Governance practices that have been a long-standing focus of regulators and investors, and include areas such as risk management, corporate decision-making and business ethics.

The importance of ESG within a corporate environment has risen significantly in recent years as stakeholders have shifted their expectations of corporate behaviour from a “shareholder capital” approach popularised by Milton Friedman in the 1970s – which advocated a sole focus on profit generation1 – towards a more holistic stakeholder capitalism approach, which incorporates the awareness and impact of a business on its broader environment. 

Many businesses are striving for a sustainable business strategy to cover ESG factors while also positively benefitting their shareholders. Another way that business leaders are approaching this is by adapting from a standard ‘bottom line’ to a ‘triple bottom line’ concept: “The triple bottom line is a business concept that posits firms should commit to measuring their social and environmental impact in addition to their financial performance, rather than solely focusing on generating profit. It can be broken down into ‘three Ps’: profit, people, and the planet.”

Basically from my perspective, if we focus on people and planet, profit will follow. Profit, per se, will not happen and is a spurious goal. All our actions will result in profit or loss. More important than profit is cash flow, especially if you have to “weather” through Covid or a recession.

Reference:

ESG in deals and investment (Best-Practice Guideline 69), Deloitte / ICAEW