What are ESG criteria and why are they key for companies?

ESG criteria

In 2015, the United Nations announced the ambitious initiative of the 2030 Agenda: a strategic plan to promote sustainable development and diversity.

For this to happen, the UN established 17 Sustainable Development Goals (SDGs) that must be achieved in order to tackle poverty, inequality, climate change, environmental degradation and to promote prosperity, peace and justice.

In this context, and almost in parallel, the ESG criteria also came about. Although similar in ways but different, ESG can be understood as a methodology or “road map” that must be followed to achieve the SDGs. But what exactly is ESG and why should you create a corporate strategy taking them into account?

What are ESG criteria?

ESG stands for Environmental, Social and Corporate Governance. The ESG criteria are standards that serve to measure the impact of a company on the environment and society, as well as business resilience and administrative transparency.

The latter is important in terms of company leadership, internal oversight, shareholders’ rights and salary compensation, among others.

What are the pillars of ESG criteria

To understand the ESG criteria is, we must understand that the term encompasses three fundamental pillars. Each of them constitutes a criterion to be taken into account:

  • Environmental sustainability

The environmental criteria refer to the impact of business, manufacturing, financial and organizational management activities, which affect the environment.

These include direct and indirect greenhouse gas emissions, stewardship of natural resources, and the company’s overall resilience to physical climatic risks. For example, in the face of climate change, floods and fires.

  • Social responsibility

The second pillar refers to the relations of an organization with its internal and external stakeholders.

Within the organization, examples of factors by which a company can be measured include human capital management metrics: fair wages, the gender gap and employee engagement metrics.

But it also includes the impact of an organization on the communities that it operates in and supply chain partners. This is particularly focused on developing economies where environmental and labor standards may be less robust.

  • Corporate governance

This last criterion refers to how a company is led and managed. Analysts tasked with assessing ESG criteria will seek to better understand how leadership incentives align with stakeholder expectations.

This involves paying attention to what shareholder rights look like, what kind of internal oversight is in place to promote transparency, and leadership accountability, to prevent phenomena such as money laundering.

ESG criteria benefits for companies

According to the specialized business publication, McKinsey Quarterly, there are at least five key benefits for organizations when deciding to incorporate ESG criteria into their business strategy:

  • Significant growth

A business proposal based on ESG criteria helps companies access new markets and expand in the areas they are already operating in.

When government authorities trust corporate actors, they are more likely to give them access to tax benefits. For example, it will be easier to achieve approvals and permits, which provide new growth opportunities.

  • Cost reductions

The ESG criteria can also substantially reduce costs. By focusing on the responsible use of resources, it helps combat the increase in expenses for operational management.

In the case of obtaining and managing raw materials, this includes the use of water or carbon emissions. According to the McKinsey report, companies may see an increase in profits of up to 60%.

  • Improved productivity

If we take into account that employees are a company’s main capital, we understand that productivity and efficiency in human resources are key elements to achieve business objectives. In this sense,

ESG also contributes positively. Employee satisfaction is positively correlated with shareholder returns.

According to the McKinsey report, Alex Edmans of the London Business School found that companies on Fortune’s “100 Best Companies to Work For” list generated a 2.3% higher share return; 3.8% more than their peers over the last 25 years.

How to manage ESG criteria in companies?

Now, you are probably wondering how to transform your own company into an organization with an ESG-focused strategy, right?

For this to happen, you must start at the beginning: by being aware that you want to transform your company.

How to do this? By engaging all your employees around one or all of the pillars that you want to reinforce, whether environmental, social or governance.

isEAzy ESG app

The next step is as simple as accessing a complete solution, which will make it easier for you to create a comprehensive business sustainability plan.

From the initial exploration phase to gauging the degree of knowledge and motivation of your employees regarding ESG, to the measurement of results.

isEazy ESG allows you to transform your business so that it is ESG compliant. The solution provides an initial approach to find out the level of knowledge and motivation of your employees regarding sustainability, choosing from more than 65 courses developed with the highest global standards on this topic, and generating realistic challenges and missions with tangible results. Results that you can include in your non-financial sustainability reports.

Transforming your company and making it more sustainable is now possible. The ESG criteria allow you to be part of the change and contribute to the preservation of the environment and society, while turning your professionals into true agents of change.

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