ESG Investing: How to Prioritise Social Practices for ESG Success
In today’s rapidly evolving landscape, ESG has become a powerful force of transformation in the business world. For businesses and investors alike, embracing the new ESG investing trends and principles can offer numerous benefits. Not only does it make a positive impact on the world around us but it also can boost business profitability in the long run. In this blog, we’ll break down what ESG investing is, delve into its advantages, and provide practical insights into how you can embrace social practices to get ahead in the world of ESG. Join us as we embark on a journey toward a more sustainable future.
What is ESG investing?
ESG investing has been making headlines in recent years and with good reason. Investors are quickly realising the interdependencies between Environmental, Social, and Governance issues as well as the various benefits of investing in companies with a high ESG score.
Environmental, Social, and Governance investing, or ESG investing for short, is a framework used to evaluate various businesses’ sustainability efforts, business practices, and social impact. Investors use this as a non-financial framework to screen investments for their potential investment risks and opportunities.
This framework considers three factors: Environmental, Social, and Governance factors. Here is the environmental, social, and governance definition:
1. Environmental
Environmental looks at a company’s concern for preserving the natural world. This includes various environmental issues such as climate change, greenhouse gas emissions, resource depletion, waste, pollution, and conservation efforts.
2. Social
The social factor looks at a company’s social responsibility. This takes a look at how a company treats its people, inside and outside of the company. This’ll consider the company’s working conditions, diversity and inclusion, human rights, community engagement, and labour practices.
3. Governance
Lastly, Governance considers how a company is run. This will look at business ethics, diversity and inclusion, executive pay, ethics, transparency, and compliance with laws and regulations.
Why does ESG matter?
Abiding by ESG best practices can have mutually beneficial effects on your business. You will not only improve the world around you but you’ll also become incredibly attractive to investors willing to invest in sustainable businesses.
This can create major financial benefits down the line. A study by MSCI found that companies that invest in strong ESG practices tend to have a lower cost of capital and are less likely to encounter regulatory fines or lawsuits. As an added bonus, the innovation brought about by ESG efforts can result in greater long-term profitability.
But why are investors turning to this new investment practice? ESG promises a long list of benefits to investors. Here are a few:
1. Higher Returns
Perhaps one of the most important aspects of ESG investing is that companies with these practices are proactive and socially, and environmentally minded. These qualities are vital for the future success of our society and the survival of a company. Businesses like this will ultimately outlast companies that don’t exhibit these qualities. This will therefore create higher returns for investors when it’s time to sell.
2. Risk Management
Using an ESG framework helps investors gain better insights into the risks associated with a particular company. This will cut out businesses that have irresponsible or bad business practices and expose their long-term viability. These risks may include any potential financial, regulatory, and reputational risks. If these risks are identified early on, investors can move on to other investments, making their portfolios more resilient.
3. Market Outperformance
How can you improve your Social ESG business practices:
Now that you’re aware of the various benefits of ESG investing, you may be wondering where you can start implementing these practices into your own business. Focusing on social ESG practices may be the best place to start. As a reminder, the social factor of ESG investing looks at how you are treating people.
This may include how you conduct relationships with your employees, customers, suppliers, and your local communities. Here are a few ways you can start implementing better social ESG practices into your business model:
1. Diversity and Inclusion
Perhaps the most important social element of any business is to ensure you have a work environment that is inclusive and respects individuals from all cultural backgrounds. To do this you could make sure there is diversity in hiring, clear career development, and a variety of leadership positions available to various races. An effective long-term strategy to achieve this is to invest in regularly upskilling your staff.
This can be done by putting your staff on learnership programmes. Learnership programmes are accredited work-based programmes that include both practical and theoretical elements. These aim to give previously disadvantaged individuals access to quality education so they can obtain a certification that can grant them entry into the workplace. By investing in a learnership you’ll gain valuable BEE points that will increase your BBBEE scorecard and ultimately show investors that you are serious about making a meaningful contribution to the South African economy and its people.
2. Supply Chain Responsibility
Sustainability shouldn’t end with what you bring to the table, it should include everyone that is involved in your supply chain. Therefore it’s important to make sure that those you are working with follow sound business practices, have ethical labour practices, adhere to human rights standards, and aim to have a better environmental impact. To have a better understanding of where your suppliers sit with these requirements you can conduct supplier audits and assessments to verify their compliance.
Additionally, making sure you are trading with companies that have a high BBBEE score and Skills Development efforts can also be a good reflection of your social practices. It will ultimately show your company’s commitment to diversity, inclusion, and economic empowerment in South Africa.
3. Employee Wellbeing
As the famous saying goes, “A company is only as good as the people it keeps.” Therefore you want to always make sure your staff is always operating at their best. To do this you want to prioritise the health, safety, and well-being of your employees. This means keeping tabs on occupational health and safety risks and making sure you comply with relevant labour standards and regulations.
Additionally, this can be done by offering better job satisfaction. This involves giving out competitive salaries, attractive benefits, a supportive work-life balance, and mental and physical health initiatives. Another gateway to employee satisfaction is to ensure their growth isn’t stifled. Encouraging continual development through soft skills workshops, short course training, and career advancement opportunities may be just what your staff needs to thrive.
4. Engage with Local Communities
Social impact can reach much further than your doorstep. By reaching out and making a difference to those around you, you are not only meeting an ESG requirement but you are also creating a lasting impact in your community. To do this you can reach out to your local community and see how you can help. This can be done by supporting community developments, such as investing in education and health care or contributing to other social and economic well-being programmes. Reaching out to local stakeholders may give you a better understanding of how you can make a meaningful impact.
Luckily, socio-economic development is another vital element in BEE that can positively contribute to your BBBEE scorecard. YES programmes are popular initiatives that seek to address the high Youth unemployment rate in South Africa. This is done by giving young people between the ages of 18 and 35 workplace experience, typically over a year, in the form of internships, full-time or part-time roles. Getting involved in an initiative like this can add valuable BBBEE points to your scorecard.
