By now, ESG is an acronym that every business leader should recognize. That’s because environmental, social, and governance (ESG) programs have become increasingly common across the business landscape, regardless of industry. The emphasis on a company’s sociocultural and environmental performance is also a bellwether of larger national trends. But, with much of the buzz around ESG centered on public companies and the Securities and Exchange Commission’s (SEC) upcoming decision on climate-related disclosures this October, what does it mean for private companies? When, and how, do they tune in to ESG programs?
A Sign of the Times
While Forbes tracks the origination of ESG within the business world as far back as the 1960s, it has certainly gathered steam in recent years. Even the “E” alone in ESG has gathered significant momentum. According to the Pew Research Center, a majority of Americans would like to see more done at the national level to tackle climate change, and support for environmentally conscious decision-making is strikingly bipartisan. Consumers and investors place importance on ESG metrics broadly, and the concerns of environmental sustainability have entered recent legislative measures, such as the clean-energy provisions of the Inflation Reduction Act of 2022.
ESG: Good Sense & Good Cents
ESG is not about ticking a single box or broadcasting an isolated set of metrics. Rather, as Forbes notes, ESG requires engagement among all stakeholders, including investors, consumers, employees, regulators, and communities.
And speaking of consumers, there’s evidence suggesting that people buy with ESG in mind. According to Glow, the vast majority of consumers say that it is important for businesses to act in socially and environmentally responsible ways, and 25% report they have changed brands due to perceptions of a company’s ESG performance. In other words, ESG can affect the bottom line—literally.
The Trickle-Down (or Up) of ESG
While it’s true that the upcoming SEC decision is focused on public companies, it has implications for private companies, too. That’s because Scope 3 of the SEC changes require public companies to disclose carbon emissions both up and downstream, reporting on the emissions produced by their suppliers and customers. Beyond the SEC proposed rules, many companies under scrutiny for their ESG efforts are actively incorporating ESG considerations into their procurement practices. In other words, those who work with public companies may soon see increased requests for disclosure, and they will need to be prepared to provide that data.
That means some private companies will need to prepare to take many of the same steps public companies are embarking upon to meet SEC regulations, including establishing internal teams, reviewing disclosure requirements, performing data-assessment, and establishing internal controls. Enlisting a professional early can help ensure compliance is iron-clad.
ESG and Risk Management
Attending to ESG issues goes beyond environmental responsibility, though. The social factors of ESG include fair wages, human rights, and employee health and safety. The governance factors include board management and diversity of leadership. Putting ESG programs in place means making sure these elements of a business are driven by thoughtful, strategic planning, and that data is gathered with the aim of continual improvement. Therefore, ESG is one way that business leaders can help ensure that they are doing their due diligence to serve those who work for and within their companies in a way that is responsible and compliant with regulations and standards.
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