ESG – What is it? And why should entrepreneurs care?
Posted on December 13, 2021
A common term many entrepreneurs are increasingly hearing is ESG, which stands for Environmental, Social, and Governance (ESG). While ESG is certainly not new, there has been a global focus on a efforts in each of the three areas.
Academically, ESG requires entrepreneurs to evaluate their business to determine how it serves its customers and interacts both within and outside of the company and the environment. A common misconception is that ESG is primarily focused on climate change. Sure, the E (environmental) pillar focuses on the environment in which the company operates within. Entrepreneurs should focus on how their company uses natural resources, its conservation efforts, and general focus on long term sustainability. A relatively easy way to start is for Entrepreneurs to evaluate their carbon footprint and energy use. If the business involves the use of chemicals, the company might determine if there is a more environmentally friendly option.
Where things get more complex is under the “S” and “G” pillars. “S” - Social issues require Entrepreneurs to evaluate their company’s diversity and inclusion efforts from senior management to entry-level employees. Employees today are focused on working for companies that provide the very best in Wellness programs and flexible work environments.
“G” Governance focuses on a company’s leadership and how it guides the company to have a positive impact. Governance also will include evaluating how companies hire, promote, decide compensation and determine how leadership is defined. This extends beyond diversity and inclusion. It requires Entrepreneurs to re-think on equity in compensation, transparency and fit to role.
Why is ESG Important?
The obvious reasons why Entrepreneurs should care about ESG is about doing business more effectively. For example, conserving energy, using renewable energy, and recycling can reduce costs and surprisingly improve profitability. Next, creating a diverse workforce where employees are valued and treated fairly will attract top talent, improve morale, and reduce turnover. Millennials and Gen Z, which are entering adulthood, together now make up a significant portion of our workforce. For Gen Z, addressing climate change, equity, and social justice aren’t optional. Millennials and Gen Z now demand employers of all sizes adopt ESG initiatives, and those who don’t while likely to not attract talent, and ultimately not survive.
Finally, and arguably one of the most intriguing reasons why Entrepreneurs should be focused on ESG is the impact this is the transformation of our economy is driven by institutional investors, lenders and asset managers. What does this mean? In simple terms, if Entrepreneurs are going to be relying on investors or lenders e.g. their commercial bank to fund capital expansion, working capital and growth capital, then, they must meet the expectations on reporting and accurately disclose ESG information. In the very near future, commercial banks will require their customers to report and disclose on ESG related metrics, such as those set by Financial Stability Board (FSB) when they established the Task Force on Climate-related Financial Disclosures (TCFD), or more broadly, the United Nations Sustainable Development Goals (SDGs). Those companies that comply successfully may have access to enhanced capital for expansion, cost reduction in access to capital and more grants offered by all levels of government.
Next steps and How can Propel 360/MRI help?
Here at Propel CPA, our ambition is for all our customers to develop a long-term strategy so that each company can be a self-sustaining enterprise that can scale. In order to do so, we will work closely with Entrepreneurs to develop a unique ESG Strategy, tailored to your business.
As next steps, talk to your Propel specialist and see how Propel360™ and our MRI™ program including MRI™ Group sessions can help in your journey to take the first step in developing an ESG program and let us show you how this can immediately transform your business and increase profitability.