# ESG Prepared: Why Ignoring ESG is a Costly Business
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-02-20
Category: BUSINESS
Category URL: https://financedigest.com/category/business
Meta Title: The rise of ESG: Why it's crucial for businesses now
Meta Description: Learn about ESG and why it's crucial in today's business landscape. Find out how to ensure your company is ESG prepared for future success.
URL: https://financedigest.com/esg-prepared-why-ignoring-esg-is-a-costly-businesshtml

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_By_ **_Leas Bachatene,_** _CEO_ [_ethiXbase_](https://ethixbase.com/anti-bribery-and-corruption-questionnaire)

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Leas Bachatene, CEO ethiXbase

From COP26’s spotlight on the environment and recent extreme weather events, to the devastating human rights violations and inequalities that continue to make the news, the 2020s have catalysed the momentum of Environment, Social and Governance (ESG) enforcement and it’s important on the people and businesses of our planet.

And this momentum is gaining fast. By 2025, Bloomberg calculates that global ESG assets will exceed [$53 trillion USD,](https://www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/) representing more than a third of the $140.5 trillion USD in projected total assets under management. [Businesses used to reporting heavily on financial metrics need to be ready](https://www.financedigest.com/2018-is-a-year-of-regulation-is-your-business-ready.html "2018 is a year of regulation – is your business ready?") for sustainability accountability, as it fast becomes a focus of consumers, investors, regulators, employees and shareholders alike.

By incorporating broader environmental and sustainability metrics in their decision-making now, organisations can be on the front foot as demand and scrutiny increases. Failing to do so is quickly becoming a costly business. Here’s what you [need to know to ensure you are ESG prepared](https://www.financedigest.com/why-preparation-for-new-swift-cyber-security-standards-needs-to-start-now.html "‘Why preparation for new SWIFT cyber security standards needs to start now’").

**What is ESG and why is it important?**

In short, ESG stands for Environmental, Social and [Governance and is a measurement of a company’s level](https://www.financedigest.com/2016-must-be-the-year-of-board-level-transparency-and-good-governance.html "2016 must be the year of board level transparency and good governance") of sustainability. It is a [standardised set of criteria](https://ethixbase.com/what-is-esg-reporting-and-why-is-it-important) for a company’s operations that investors use to screen potential investments as well as monitor their performance over time.

ESG is scored on how companies perform in three key pillars:

 Environmental considers how companies use energy and manage their environmental impact, including factors such as energy efficiency, carbon emissions and waste management.03. **Social** considers how companies foster their people and culture and how that ripple effects on the broader community. Factors considered are diversity, inclusivity (D&I) and gender, employee engagement, customer satisfaction, [data protection](https://www.financedigest.com/finalised-pan-european-data-protection-laws-set-the-new-standard-for-a-privacy-friendly-business-environment.html "Finalised Pan-European data protection laws set the new standard for a ‘privacy-friendly’ business environment"), privacy community relations, human rights and labour standards.
04. **Governance** considers companies’ internal systems of controls, practices, and procedures and how an organisation [stays ahead](https://www.financedigest.com/staying-ahead-of-risk-this-black-friday.html "Staying Ahead of Risk This Black Friday") of violations.

The [supply chain](https://www.financedigest.com/2023-supply-chain-trends-for-businesses-to-ensure-a-more-efficient-supply-chain-strategy.html "2023 supply chain trends for businesses to ensure a more efficient supply chain strategy") represents the largest potential risk for companies and is where ESG becomes vitally important. Today, it is estimated that [80% of global trade](https://www.agcs.allianz.com/news-and-insights/expert-risk-articles/esg-risk-briefing-3-2017.html) passes through supply chains. This exposes companies to significant reputational and operational risks which may harm their asset price or market value, financial performance and reputation. Supply chains fall outside of a company’s core operations and consequently lack common governance standards and are often opaque.

To manage these risks, companies must audit their third-party networks to reveal any red flags, missing information and outdated data on an ongoing basis. Understanding the ESG risks within their supply chains is vital to preventing reputational damage but given the sheer size of today’s disparate and multi-tiered networks of partners, suppliers and third parties, this is often easier said than done. Today’s ESG and sustainability risk management solutions can take much of this burden away and empower [companies to maintain sustainable business](https://www.financedigest.com/keeping-an-eye-on-company-purse-strings-where-do-businesses-go-wrong.html "Keeping an eye on company purse strings – where do businesses go wrong?") practices quickly and cost effectively.

**How can ESG [ratings impact](https://www.financedigest.com/russia-could-hike-rates-in-2023-if-inflation-risks-have-big-impact-cenbank.html "Russia could hike rates in 2023 if inflation risks have big impact -cenbank") your company?**

There are a magnitude of benefits of having robust ESG policies and credentials. A high ESG score correlates to [increased profits](https://www.financedigest.com/4-tips-for-landlords-to-increase-rental-property-profits.html "4 Tips for Landlords to Increase Rental Property Profits"), increased consumer demand and improved resistance and productivity during demanding times. According to the [MSCI World Index](https://economictimes.indiatimes.com/blogs/et-commentary/esg-a-marathon-not-a-sprint/), the average cost of capital of the highest ESG-scored quintile was 6.16%, compared to 6.55% for the lowest ESG-scored quintile.

Companies with high-achieving ESG scores are better positioned to attract better human capital and have more engaged and motivated employees. A report by [Marsh & McLennan](https://www.marshmclennan.com/insights/publications/2020/may/esg-as-a-workforce-strategy.html) predicts that by 2029, the Millennial and Gen Z generations will make up 72% of the world’s workforce. These generations set a [greater value](https://www.financedigest.com/keeping-data-connected-for-greater-business-value.html "Keeping Data Connected for Greater Business Value") on environmental and social concerns and will expect employers to share similar beliefs and values as them.

According to a report by the [Environmental Defence Fund,](https://www.edf.org/sites/default/files/Business-and-the-Fourth-Wave-of-Environmentalism_2019.pdf) 93% of consumers will endeavour to hold businesses accountable for environmental impact, and a report by PWC found that [48%](https://www.pwc.com/us/en/services/consulting/library/consumer-intelligence-series/consumer-and-employee-esg-expectations.html#:~:text=Consumers%20and%20employees%20are%20rewarding%20business%20for%20ESG,they%E2%80%99re%20prepared%20to%20reward%20%28or%20penalize%29%20brands%20accordingly.) of consumers want companies to show more progress on social issues and 54% on governance issues.

High ESG scores show that your company is doing its part to decrease environmental impact, taking stances on community issues and has a diverse and inclusive workforce. For investors, companies with good ESG scores are thought to be well prepared to deal with future tasks, foresee beneficial opportunities and make better long-term decisions.

Conversely, a company that has a poor ESG score or has not implemented an ESG policy can experience significant [financial and reputational impacts](https://www.financedigest.com/how-mifid-ii-will-impact-financial-advisor-communications.html "HOW MIFID II WILL IMPACT FINANCIAL ADVISOR COMMUNICATIONS"). This will ultimately erode or even lose the trust of consumers and investors, which may then lead to reduced sales, funding and investment.

**How is ESG measured and scored?**

Though there remains some discretion as to exact scoring methodologies and frameworks governing ESG scoring and rating processes, some best practices across ESG scoring have emerged. In most cases, ESG rating agencies rate companies based on information gathered from multiple sources including a company’s own data, Government [data banks](https://www.financedigest.com/reckon-introduces-link-to-bank-data-to-help-small-businesses-streamline-the-reconciliation-process.html "Reckon introduces link to bank data to help small businesses streamline the reconciliation process "), the media, and NGOs or other stakeholders. Questionnaires may also be used to gather further information from companies.

Verifiable [ESG disclosures are expected to adhere to a specified set](https://www.financedigest.com/green-bonds-are-set-to-drive-corporate-esg-debt-out-of-slump-in-2023-barclays.html "Green bonds are set to drive corporate ESG debt out of slump in 2023 -Barclays") of mandatory and voluntary requirements. Until ESG scoring becomes mandatory, it has relied on transparency. This allows stakeholders to compare performance, gain a clear picture of a company’s direction and make long-term beneficial decisions.

However, as an increasing number of business-relevant legislative Acts are passed, such as the Modern Slavery Act in the UK and Australia or the more recent lLieferkettensorgfaltspflichtengesetz (LkSG) in Germany, it’s more important than ever for businesses to start viewing ESG [scoring](https://www.financedigest.com/5-ways-to-grow-your-business-despite-a-bad-credit-score.html "5 Ways to Grow Your Business despite a Bad Credit Score") as a mandatory business process.

**How to improve your ESG reporting?**

The first step to achieving good ESG reporting is to have a reliable, sustainable [business framework as well as choosing the right metrics](https://www.financedigest.com/5-fx-metrics-your-business-should-be-tracking.html "5 FX METRICS YOUR BUSINESS SHOULD BE TRACKING"). Taking steps that are recognised as being key to your company’s operation will shine through in ESG performance. This starts with integrating ESG [data and an ‘ESG mindset’ into everyday business](https://www.financedigest.com/5-simple-ways-to-prevent-a-data-breach-from-putting-your-accountancy-practice-out-of-business.html "5 Simple ways to prevent a data breach from putting your accountancy practice out of business") operations. This mindset will enable your organisation to create a platform for further internal activity and your supply chain.

Frequently reporting on processes used to meet ESG goals as well as any remediation action and methodologies that have been taken to improve your operations will help make accurate ESG judgments. By identifying exactly how your [business is going to achieve your ESG goals is important](https://www.financedigest.com/four-reasons-whycloud-based-inventory-management-is-important-for-your-ecommerce-business.html "Four reasons whycloud-based inventory management is important for your ecommerce business") to stay on top. Analytics and data visualisation plays a key role in this and can help your organisation identify which areas of your [business need](https://www.financedigest.com/4-kinds-of-software-your-new-business-needs.html "4 Kinds of Software Your New Business Needs") improvements on ESG areas.

Identifying the ESG gap in your [supply chain is crucial and can be the difference between failure and long-term success](https://www.financedigest.com/5-steps-to-successful-supply-chain-finance.html "5 Steps to successful supply chain finance"). It’s fast becoming a fundamental [business requirement to be able to prove that you are measuring authentic sustainability and social impact with genuine continuous improvement](https://www.financedigest.com/5-ways-to-improve-your-business-finances.html "5 Ways to Improve Your Business Finances") to gain trust and recognition in the market. Those that act now will reap the benefits, but those that delay will [count the costs](https://www.financedigest.com/analysis-east-europeans-count-their-pennies-for-christmas-as-food-costs-soar.html "Analysis-East Europeans count their pennies for Christmas as food costs soar") sooner than they think.


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