What does ESG mean for my business?

There’s a lot of noise in the world at the moment about ESG.  References to ESG are references to a business’ Environmental, Social, and Governance framework.

So, what is ESG?

Put simply, ESG is really about businesses doing the right things, taking a long-term view, and considering their place in society, not just their profits. Importantly, there are three letters in the acronym. At present, many focus on the E, but ignore the other letters’ importance. ESG encompasses three dimensions:

  • Environmental – This relates to business’ impact on the environment. Does my business care about the world it leaves behind?
  • Social – This encompasses how the business treats people, including staff, customers, and others in their supply chain. Does my business care that people are treated fairly?
  • Governance – This includes decision-making, transparency, compliance and ethics. Does my business have systems and processes to ensure the right things are being done and to evidence the fact?

Who cares about ESG?

Whilst ESG frameworks have traditionally been the domain of big business, increasingly customers, staff (including prospects) and others in the business supply chain are looking to ensure that businesses they engage with have appropriate ESG frameworks. If you have sought finance in recent years you will likely have experienced this from your financier.

What does this mean for my business?

The most well-established and well-defined of the three dimensions that is often also the easiest to implement is effective governance within your business. Governance is also heavily linked to other elements of ESG. In particular it has a major impact on perceived and demonstrated social responsibility. Implementing strong governance measures is a contributor to ensuring a high level of social responsibility.

A simple example of this is wage underpayments. A failure to have the systems and processes in place to ensure that minimum staff conditions are being provided can lead to substantial costs. These being not just the back payment of wages and associated penalties, but also reputational risk for the business in the broader community. Some buyers will simply refuse to consider to acquire a business that has such issues due to the potential risk.

How can I improve my ESG?

In a practical sense, making improvements in your ESG can be done through the adoption of a range of measures, including the following:

  • Implementation of advisory boards;
  • Leadership and management structure revisions through succession planning or business growth;
  • Risk management process improvements – recognising and mitigating risks before they happen; and
  • Increased and streamlined Internal controls.

The benefits of strong governance

The implementation of strong governance measures can result in improvements in areas of operational and/or strategic importance, including:

  • Increased clarity and accountability, benefiting both stakeholders and businesses.
  • Enhanced Investor appeal of the business – showing foresight your business is contemplating ESG and planning to address the basics at the very least.
  • Improved risk management – identifying and mitigating risks, and fostering crisis readiness.
  • Innovation and resilience – encouraging adaptable and innovative cultures within the business.
  • Growth in long-term value – having a better run business in the long term will generate better profit and potentially a larger business exit value.

Covering all bases

Whilst governance measures are likely to be common across industries, the application of the environmental and social aspects can be industry and business centric. Many are seen as non-financial and therefore harder to convince businesses to uptake. However, non-financial drivers can also have financial impacts on the business at a later stage. Therefore, it’s best not to ignore these factors but be aware of them, i.e. have good governance, to ensure where they are relevant to your business, you can adopt the appropriate measures.

Learn more

For more information on how Pilot can assist you in developing stronger governance for your business, contact Cameron Woodcroft on cwoodcroft@pilotpartners.com.au or your Pilot advisor on 07 3023 1300.