ESG began as a program supporting corporate responsibility. It has evolved into an inseparable core element of business strategies across the organization. - By Robin Byrd

Organizations develop programs to address specific needs, like Diversity, Equity, and Inclusion (DEI) programs designed to move organizational cultures and Human Resources practices toward being more inclusive. ESG - Environmental, Social, Governance – also began as a program supporting inclusion, an element of the “S”, environmental sustainability, and good decision-making regarding people, communities, and the environment. It has since evolved to be much more.

Like all critical organizational programs delivering measurable value, ESG has been integrated into general business strategies and decision-making. It supports the values and needs of the business, including the need to operate ethically, maintain a good reputation, ensure long-term access to resources, reduce risks, and support people and communities. Indeed, these days, ESG flows through all decisions made.

How ESG Integrates with Corporate Decision-Making

ESG, corporate social responsibility (CSR), and business sustainability are related. For example, corporate social responsibility is exercised based on ESG principles of making decisions that benefit people and communities by not harming the environment. Business sustainability is developed by including ESG and corporate social responsibility practices.

Business strategies are developed to promote long-term business success. ESG has an encompassing set of goals that requires firms to consider more than just the pure needs of the business. ESG focused firms embrace principles like preserving biodiversity and supporting the UN Sustainable Development Goals, engaging communities, developing responsible supply chains, and maintaining ethical business practices. The integration of ESG into business strategy development leverages the ESG principles to drive decision-making at the executive and operational levels when focused on things like fair and equitable pay, reduction of greenhouse emissions, and reporting transparency.

Incorporating ESG principles and practices into a business strategy can deliver critical benefits. It increases competitiveness and drives a focus on strategizing for long-term sustainability as natural resources are depleted or natural destructive events accelerate in number and intensity, like flooding and tornadoes, due to global warming. Supply change management embraces environmental sustainability and diversity as success factors. Another benefit is that the business becomes more attractive to customers who shop responsibly and ESG-focused investors.

Risks, Impacts, and Disruptions of Including ESG in Business Strategy

Sustainable finance is the process of taking ESG considerations into account when making investment decisions. The EU Commission describes sustainable finance as supporting economic growth while reducing environmental pressures and considering social and governance aspects. It includes transition investing in what already exists as environmentally friendly and what is in a transitioning stage. Businesses that are already green or reducing (transitioning) their carbon footprint in a way that includes social aspects are better positioned to attract ESG-focused investors. ESG Today notes that global sustainable fund assets tripled over the last three years to 2 million euros.

ESG is a financial risk management tool, one of its most important benefits but not its only one. It identifies risks and opportunities associated with factors like climate change or societal disruptions like protests demanding social justice. As Kyushu University explains, ESG looks at “risks, impacts, and disruptions and to what extent they could affect both the financial returns of the companies, but also how companies might exacerbate these issues even further through their own activities.” ESG and sustainability are inseparable.

Sustainability is a broad concept that considers the impacts of the company and how global resources should be managed to meet the needs of future generations (opportunities). Incorporating both ESG and sustainability into decision-making supports financial stability (ESG) and creates value for people and communities while preserving natural resources (sustainability).

How ESG as an Integrated Strategy Creates Value

ESG has become a way of doing business, so its integration into all strategy and decision-making is a natural result of embracing ESG and sustainability. Doing so safeguards business success. Some critics believe ESG is a modern-day construct that creates a drag on business value. The truth is that ESG creates value. Researchers in Five Ways That ESG Creates Value name five strong links between a strong ESG proposition and value creation. The first value point is top-line growth by attracting B2B and B2C customers interested in buying more sustainable products. ESG also leads to better resource access due to more robust community and government relations. Second is cost reductions, which flow to the bottom line. Examples of reduction include reduced water intake and lower energy consumption. The third value created is a reduced risk of regulatory and legal interventions through compliance that may lead to benefits like the freedom to advertise without restrictions and no incurrence of fines and penalties. Fourth is a productivity uplift as employees are more motivated, and the company can attract top talent interested in working for a company with a culture based on ESG and sustainability principles. Fifth and finally, value is created through enhanced investment and asset optimization. The business can better allocate capital for the long term, increasing investment returns and avoiding investments that may not pay off in the future because of environmental issues.

It is easy to see that keeping an eye on ESG in decision-making leads to a stronger, more profitable, and more sustainable company. Through more effective decision-making, companies are more adaptable, a critical quality in the ongoing uncertain marketplace. ESG can help firms navigate climate change, increasing regulations and legal requirements, public expectations for social justice, and changing availability of natural resources. Plus, while it is tempting to think ESG is only about risk minimization, it is concerned with so much more, including attracting job candidates who will support the ESG-based culture and retaining them through consistency.

Prioritizing Strategies

ESG helps organizational leaders prioritize during strategy development, which leads to better decision-making. Though commonly presented as a risk management strategy, it is essential not to lose sight of the fact that ESG is also about long-term growth, sustainable profits, and helping people in the workplace and communities thrive in the long term. Thus, integrating ESG and sustainability into business decision-making makes sense any way it is viewed.