Environmental, Social, and Governance (ESG) has emerged as an essential framework for companies globally, influencing how they manage environmental impacts, social responsibilities, and governance practices.
ESG focuses on sustainability and ethical standards, shaping the decisions of businesses, investors, and stakeholders. This blog post explores what ESG entails, how it became critical for companies, and the key data from recent reports on the subject.
ESG evolved from earlier corporate social responsibility (CSR) concepts, gaining popularity in the early 2000s when investors started to focus on ethical investment strategies. However, in the past decade, it has expanded beyond just investor interests to become a comprehensive framework for promoting sustainable business practices.
Effective in 2024, the European Union’s Corporate Sustainability Reporting Directive (CSRD), requires companies to report on a broader range of environmental and social metrics. KPMG highlights that companies now must disclose detailed ESG information covering everything from climate change mitigation to biodiversity and resource conservation across the entire supply chain.
Why has ESG become so essential? ESG is now intertwined with business strategy, making sustainability, employee well-being, and ethical governance crucial to long-term success. According to Deloitte, organizations are increasingly expected to demonstrate their impact on global challenges such as climate change and human rights, aligning corporate operations with the United Nations’ Sustainable Development Goals (SDGs).
The “E” in ESG focuses on environmental sustainability, particularly in reducing carbon footprints and managing natural resources. The urgency of addressing climate change has led to stronger regulatory frameworks, pushing companies to track and reduce greenhouse gas emissions, shift toward renewable energy, and adopt resource conservation strategies.
The 2023 Global Impact Report by Deloitte shows significant strides in environmental metrics, including a 79% reduction in Scope 1 and 2 greenhouse gas emissions compared to 2019 levels. Many firms are setting ambitious goals, such as achieving net-zero emissions and committing to sustainable business travel policies.
These environmental commitments not only reflect corporate responsibility but also improve risk management, ensuring companies are prepared for regulatory and market shifts.
The “S” focuses on social factors such as labor practices, employee well-being, and community engagement. Amid increasing attention to human rights and diversity, equity, inclusion, and belonging (DEIB), companies are expected to foster environments that support fair wages, non-discriminatory policies, and employee development.
Recent developments underscore how critical social responsibility is to corporate reputation. For instance, reports from Affirmity show that companies in the U.S. are advancing in their DEIB efforts, especially in recruitment and onboarding. However, challenges remain, particularly in leadership diversity, where only 20% of organizations rate their DEIB leadership programs as effective.
Moreover, in Latin America, global standards for DEIB and ESG are increasingly adopted but must be adapted to local social and economic realities. These developments highlight the complexity of integrating social justice into corporate strategy, particularly in diverse markets.
The “G” in ESG centers on corporate governance — how companies manage leadership, board diversity, transparency, and ethical practices. Scandals related to corruption or poor governance can severely damage corporate reputations, making governance standards a top priority.
The 2024 KPMG Report emphasizes that new ESG regulations are enforcing stronger governance frameworks, with companies needing to integrate governance and risk management systems that comply with the latest regulatory expectations. Governance policies now require firms to provide transparency on topics like anti-corruption measures, board diversity, and executive compensation.
Notably, governance is no longer confined to internal controls; it extends into how companies manage supplier relationships and their overall impact on society. This shift has led businesses to prioritize risk assessments and transparency, both of which are scrutinized by investors and regulators alike.
Why Companies Cannot Ignore ESG
Failure to incorporate ESG factors into corporate strategy can result in legal penalties, reputational damage, and reduced access to capital. Investors are increasingly using ESG metrics to evaluate the risk and return potential of companies, and consumers are shifting their purchasing behaviors toward more ethical and sustainable brands.
The McKinsey report, “Diversity Wins: How Inclusion Matters”, emphasizes the link between diversity and business success, noting that companies with more diverse workforces outperform less diverse competitors. This aligns with broader ESG goals by illustrating how a focus on social inclusion and employee engagement can translate to improved financial outcomes.
Further, firms that lag in their ESG efforts risk missing opportunities tied to green finance, government incentives for sustainability, and the growing demand for ethical products. In Europe, for instance, ESG reporting is rapidly becoming mandatory, with over 100 new metrics introduced in the latest EU regulations.
ESG is an essential part of modern business practices. As the regulatory landscape tightens and public scrutiny increases, companies must take proactive steps to integrate ESG into their long-term strategies. The benefits of doing so are clear: companies that embrace ESG are more likely to foster innovation, attract investment, and ensure resilience in the face of global challenges.
For businesses looking to navigate the complexities of ESG, the key lies in adopting a comprehensive, data-driven approach. This includes setting measurable goals, fostering diverse and inclusive work environments, and maintaining transparent governance practices. As highlighted by the major consulting firms, ESG is not just about compliance—it’s about creating a sustainable, equitable future for all stakeholders.