The days that it was only about generating short-term profits are over. It is now generally accepted that companies also carry long-term social responsibilities. These measures are on the table under the heading of ESG – Environmental, Societal, Governance. The ESG framework incorporates attention to social goals, to the environment and climate, and attention to transparent, fair business governance.
People, Planet, Prosperity, and Principles
In 2020, the World Economic Forum published an ESG standard. It is a set of indicators that a company can use to numerically indicate how and to what extent it takes into account the interests of all stakeholders of the company. The measures are grouped around the traditional four Ps of ESG: people, planet, prosperity, and principles (governance).
Research consistently shows that companies that take up social responsibility are more likely to become, be, and remain successful in the long term. The indicators are directly linked to economic returns. Disregarding ESG-related topics can impact a firm’s profitability, success, and even survival. As a result, more and more companies are putting ESG on the corporate and board agenda.
On the Agenda
In a recent report by Ceres, 92% of the 96 large publicly traded companies studied set their own emission reduction goals, and almost 3 out of 4 publicly acknowledge climate change as a material risk to their organizations. The boardroom is not left out: 88% of interviewed companies in the study tasked their board of directors with overseeing climate and/or sustainability commitments. In a nutshell, companies recognize the problem and pledge to take individual action.
As the group of stakeholders has expanded from employees, investors, partners, and clients, to society and the environment as a whole, shareholders require more ESG-related answers than ever before from management and the board. Directors need to take proactive steps to stay ahead on the subject of climate change & risk, diversity, and human capital, as they are increasingly being held accountable in ESG oversight. Shareholders and companies are even favoring directors with a long-term vision on these ESG issues for the election of new board members.
Beyond Profits
Financial criteria remain important when measuring the performance of a company for short-term and long-term objectives, but they are no longer the only driver. Profits and cash flow are complemented with ESG measures to evaluate overall company performance. ESG values are key to leading corporations into the future. With even the Securities and Exchange Commission paying attention, boards are requiring consequential discussions regarding responsibilities, reporting, and potential reallocation of capital towards ESG areas.
Boards and management are expected to not only focus on the numbers but also align the company with the corporate purpose and how to connect to and serve society. With a growing trend toward taking more ESG measures, companies that adapt and change purposefully will have greater opportunities to thrive and innovate now and in the future.
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