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ESG Policy 101: All About ESG Policy

Customers aren’t the only ones demanding corporate responsibility. Investors and lenders are, too. ESG companies are expected to outperform fossil fuel stocks as the economic factors of climate change are finally being felt and understood.

It’s no longer acceptable for companies to ignore their impact on the environment, and the financial risks have to be reported to investors.

That’s why an ESG policy is necessary if you want to grow your company. Read on to discover more about ESG policies and how you can create one for your company.

What Is ESG Policy?

ESG refers to environmental, social, and governance. These are criteria used often by investors as they evaluate companies to include in their mutual funds or other financial investment products.

ESG policy can cover a broad range of topics, from supply chain management to employee diversity. It can also include policies that cover worker safety issues, water management, and how the company is doing its part to combat climate change.

ESG principles have been around for about 20 years, as the UN pushed an initiative to give corporations and investors incentives to make responsible changes.

Investors weren’t crazy about the idea because they saw their main duty to deliver a return on investment to their clients. They have a fiduciary duty to do so and saw ESG interfering with their profits.

Slowly but surely, investors started to realize that it was financially beneficial to get on board with ESG and responsible investing.

Consumers started to demand responsible investing, giving companies no choice but to respond. Today, many corporations are a part of the Global Reporting Initiative, which sets the standard for corporate reporting on these principles.

ESG and Sustainability

Another buzzword that’s thrown about is sustainability. They may seem similar and they’re often used interchangeably. The truth is that they are two very different concepts.

Sustainability is a broad term that has been rendered meaningless because it’s so overused. Companies will use the term to imply that they’re doing good in the world because they recycle.

ESG is very different because it holds a corporation’s feet to the fire. There is a level of accountability that is present because the company is held accountable by investors to stick to good governance.

When you have a well-written ESG policy, you have measurable goals outlines. ESG measures outcomes, where sustainability doesn’t measure anything.

Importance of ESG Policy

An ESG policy is simply good business. It helps separate your business from the competition and shows how committed your organization is to a better world for everyone.

ESG is also good for your brand. Customers that know you’re committed to their well-being are more likely to be loyal customers. It also helps your marketing team create a new marketing message that resonates. 

If you’re planning to become a global company or you are one already, you know that you face stiff regulations in countries around the world.

For example, in the European Union, there are strict corporate governance guidelines to follow. When you have an ESG policy now, you are more prepared to meet those regulations as your company expands.

In addition, new regulations are probably going to come to American companies whether you go global or not. An ESG policy will put your organization one step ahead of those regulations.

How to Create an ESG Policy

The best way to create an ESG policy is to develop a framework first, and then get all stakeholders together to create the policy.

The framework should be broken down into the ESG factors: Environmental, Social, and Governance.

The environmental framework needs to address how the corporation is taking steps to address climate change. For example, the company may be in a LEED-certified building.

The environmental policy needs to address how the company uses natural resources and map concrete steps to minimize usage.

The social framework of the ESG policy has to do with relationships. Document the labor standards of the company, how you treat your clients, employees, and vendors.

Another question that you need to address is how your company manages suppliers. Do you select suppliers that are women-owned businesses or minority-owned businesses? Do you hold them to high ESG standards as well?

These are the questions investors and lenders will want answers to before they get behind your company. Mapping them out in your ESG policy will show your commitment to holding everyone to a higher standard.

Governance policies outline how you hold yourself and your employees accountable. Corporate fraud is an issue for many investors, and they will not invest in your company if there is a hint of fraud.

How you manage your tax reports and how often you have outside audits are documented here. This addresses how your board of directors is elected and how decisions are made at the executive level.

Another issue that governance addresses is executive pay. The average CEO makes 271 times more than the average employee.

That level of economic inequality is a concern for all investors, and they want to see something a bit more equitable.

ESG Policy Matters to Your Business

The bottom line is that ESG policy matters to your bottom line. Effective environmental and social governance can appeal to consumers, investors, and lenders.

That can only help your company grow and be a responsible corporate citizen. The world is watching what you do, and when you have these policies in place, you can easily prove that you care about the world around you.

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