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What is ESG and why is it important?

What does ESG stand for?

Environmental, Social, Governance (ESG) is increasingly seen as the measure of sustainability and resilience of an organisation. The criteria are progressively being used to inform strategic goals, operational execution, and the reporting of sustainable business practices to key stakeholders/customers.

Our UK SME Risk Report showed that only 19% of the small and medium-sized enterprises (SMEs) felt sustainability was a key issue, and in particular the expectation to meet ESG requirements. In today’s world, it is essential that SMEs understand what ESG it is and why it is relevant to your business. 

What is ESG?

ESG was a phrase first coined by the United Nations in the early 2000s1 initially as a way to encourage more ethical investment practices. World leaders responded in 2006 with the report “Who Cares Wins – Connecting Financial Markets to a Changing World”.2  It provided guidelines for companies to incorporate ESG into their operations. Also, it was the first time the terminology ESG was used as a measure of climate change mitigation.

What is ESG investing?

ESG refers to the three key factors when measuring the sustainability and ethical impact of an investment in a business or company.3

Environmental

  • Climate change
  • Waste and resource management
  • Pollution
  • Materials
  • Recycling

Social

  • Diversity and social inclusion
  • Health, safety and wellbeing
  • Community impact and integration
  • Education and skills
  • Remuneration and pay equality

Governance

  • Strategies and policy
  • Procurement
  • Supply chain management
  • Reporting and financial transparency
  • Anti-corruption

ESG is not only focussed on climate change and environmental performance, but also the social aspects and the organisation’s governance of both — and all three strands of ESG are equally important.

Why is ESG important for my business?

There is a view that ESG is something only big organisations should, and are, focussing on. However, customer and supply chain pressures are now driving the message of ESG down the supply chain of larger organisations, requesting reference to ESG strategies from their SME suppliers. Larger organisations are requesting this information and are looking for alignment with their own ESG strategy. In short, they want to ensure that the products and services they are procuring help them achieve their ESG ambitions. SMEs need to respond to this to secure commercial opportunities. Regulators and investors will demand it.

What should my ESG strategy focus on?

Being able to articulate your position and give some indication of what your ESG ambitions are is very important. You could start by identifying current practices and where you can make improvements.

Environmental – This could involve looking at carbon emissions, for example. What energy reduction initiatives are you able to put in place? If you have a fleet of vehicles, do you have the ambition to move to an electric fleet? What are you doing with regard to waste and pollution? Our net-zero guide (link to be added) explores this in more detail.

Social – How is your business impacting the community and tackling societal issues such as mental health and equality? This could involve inclusive hiring and community initiatives, alongside efforts to support health and wellbeing of your workforce such as Mental Health First Aider Training.

Governance – What policies do you have/plan to have in place to support your environmental and social initiatives? What bodies are being used for accreditation or guidance of these endeavours? How your decisions are made is equally as important as the outputs themselves.

Where are you on your ESG journey?

ESG can be highly complex to embed into your existing processes and procedures. As part of the financial services industry, insurers are increasingly looking to understand the ESG performance of their clients. Many insurers are using third-party data providers for ESG insights on their clients. As a result, businesses should take ownership of their ESG story and proactively share it with their insurers.

At Marsh Commercial, we've launched a free ESG assessment tool to help you understand your current ESG performance and to help you decide on target improvements. Contact your Marsh Commercial adviser or local office for more information.

In the meantime, if you’re interested in learning more about ESG, we encourage you to take a look Marsh’s top tips for your 2021-2022 ESG journey.

At Marsh Commercial, we’re For the People, and we’re here to support you on your ESG journey.

 

Sources

1 esganalytics.io/insights/where-did-the-term-esg-come-from-anyway

2 npengage.com/companies/esg-history/

3 marketbusinessnews.com/financial-glossary/esg-definition-meaning/

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The ESG Risk Rating

An assessment that measures your businesses' environmental, social, and governance performance.