ESG is short for Environmental, Social and Governance and refers to a set of standards designed to measure what type of footprint a particular business leaves on different aspects of the real world. In other words, does the business hold itself accountable for its environmental impact, is it transparent in its financial dealings with suppliers and vendors, does it pay its workers a living wage or are its products produced in third-world sweatshops? In this post, we'll look at why ESG is becoming more important in today's business world.

ESG: A Closer Look

ESG as a concept has been around for quite a while. In the United States and elsewhere it’s referred to as “Corporate Social Responsibility” (CSR), but the underlying impetus for the practice is the same as that of ESG here in the UK.

ESG can trace its roots back about 100 years when certain titans of industry turned to philanthropy as a way to process, and let's face it, protect the incredible amounts of money they were making. John D. Rockefeller being the most prominent example. In the immediate aftermath of World War II, environmental concerns began influencing how large businesses operated and were perceived. Still, it wasn't until the late 1990s that the notion of ESG as we know it now finally emerged.

“E” is for “Environmental”

Today virtually every large business has a department dedicated to ESG/CSR. Their job is to foresee potentially problematic practices and situations, and to set about performing rectification work should all hell break loose. When corporations are perceived as having violated their environmental responsibilities - as was the case with BP during the Deepwater Horizon oil spill in 2010 - it can take years for a company to rebuild its image and regain the trust of the public.

“S” is for “Social”

In other cases, companies may have to face the music for questionable business practices. Take the case of Apple, maker of the incredibly popular iPhone. In December of 2020, workers at one of their subcontractor's factories in India rioted over poor working conditions and exploitative wages. Apple was forced to acknowledge the issue and suspend business with that supplier. In the past, such an incident would have been swept under the corporate rug. Today it makes front page news and creates a significant blot on the company's well-polished image.

“G” is for “Governance”

Governance refers to how a company is run. Are its business practices transparent? Is it acting in the shareholder’s best interest? Is it being forthcoming about problems? A prime example of poor corporate governance is what occurred at Volkswagen in 2015. At that time it was revealed through leaked documents that the company had installed cheat devices in the cars it sold in America. In short, the device could detect if the car was being tested for emissions and tweak the car's emissions output just enough to pass the test.

This bombshell revelation wound up costing VW big, including a £14 billion fine and a loss of more than £20 billion in shareholder value. Longtime chairman of VW Ferdinand Piech, was also forced to resign for his role in covering up the scandal.

Why is ESG Becoming More Important?

ESG is becoming more important because an ever-growing number of consumers demand that the products they buy and use are not being made in a way that undermines the environment, exploits vulnerable populations or masks fundamental problems.

With the world becoming ever-more interconnected and competitive businesses are often tempted to try and gain an advantage over the competition through less than honourable means. Robust ESG/CSR efforts are one of the only ways to ensure such companies are not allowed to run amok.

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