Environmental, social, and governance issues relate to investing in a business that sustainably and ethically impacts the world. It’s sometimes synonymous with socially responsible investing and impact investing.
In generations past, businesses didn’t have to worry as much about ESG practices. Yes, it was great for marketing and brand image — but ESG issues weren’t as influential as they are now.
Nonetheless, ESG today is lucrative for many corporations. Conversely, failing to uphold ESG standards proves costly to the long-term health of a business. For example, 76% of consumers say they will discontinue relations with companies that mistreat employees, communities, or the environment.
The article explores why implementing ESG practices is crucial for businesses, gives examples of ESG issues, explains how to address them, and describes key ESG trends to watch in the coming years.
What is ESG?
Environmental, social, and corporate governance (ESG) refers to criteria used to evaluate a company’s ethical and sustainability practices.
It has gained international importance due to increased awareness of global challenges like climate change and inequalities. This trend has led to substantial asset inflow into ESG funds. In fact, the value of ESG-focused ETF assets soared from $5 billion in 2006 to $403 billion by November 2022.
Thus, ESG is becoming the standard in the investment industry, particularly in Europe, where sustainable fund assets are concentrated. The most common approach is ESG integration, where these factors are systematically considered in investment decisions.
Explore our ESG strategy and ESG compliance guide for more insights.
What are ESG issues?
ESG issues refer to a broad range of environmental, social, and governance concerns that are considered in evaluating a company’s sustainability and ethical performance.
The list of ESG issues is extensive and continually evolving, reflecting the increasing importance of responsible and sustainable business practices. The common ESG issues examples are greenhouse gas emissions, waste management, human rights, board diversity, executive compensation, and corporate transparency.
Let’s explore these and other ESG-related issues in more detail below.
ESG environmental issues
Let’s begin with the top ESG issues within the environmental realm:
| ESG environmental issues | Description | How businesses can address environmental concerns |
| Climate change and greenhouse gases | A gradual increase in global temperatures caused by carbon emissions and indirect emissions associated with activities like deforestation. | Energy efficiency. Implement energy-efficient technology to reduce energy consumption. This includes upgrading equipment, improving building insulation, and optimizing transportation logistics. Renewable energy. Transition to renewable energy sources such as solar, wind, and hydroelectric power. Carbon offsetting. Invest in carbon offset projects like reforestation to compensate for emissions. |
| Resource depletion | Overuse and depletion of natural resources like minerals and fossil fuels. | Circular economy. Establish recycling programs where products and materials are designed for reuse and recycling. Responsible land use. Eliminate deforestation from direct operations and supply chains. |
| Pollution | Contamination of air, water, or soil. | Clean technologies. Invest in environmentally friendly technologies, such as emission control systems. Green procurement. Use eco-friendly and non-toxic materials to reduce pollution in the supply chain. |
Here are a few examples of companies that have successfully implemented environmental initiatives:
- Apple. Apple has achieved a significant milestone by making the Apple Watch its first carbon-neutral product, setting the stage for its broader goal of carbon neutrality across all products by 2030.
- IKEA’s circular economy. IKEA promotes a circular economy by offering furniture take-back programs and recycling materials for new products. Their commitment is to use 100% renewable or recycled materials by 2030.
ESG social issues
Here’s an ESG issues list describing key social challenges:
| ESG social issues | Description | How businesses can address social issues |
| Labor practices and workers’ rights | Adherence to labor laws and fair workplace conditions for employees. | Employee benefits. Provide benefits like parental leave and retirement plans to support employees’ well-being and financial security. Fair wages. Provide fair compensation that reflects market standards and cost of living. Conducting annual salary reviews is a must in this case. |
| Employee diversity and gender equality | Hiring people from diverse backgrounds and ensuring all individuals feel valued. | Diverse hiring practices. Implement blind recruitment strategies to eliminate bias. For example, removing names and gender identifiers from resumes can be helpful. Diversity education. Provide diversity and inclusion training programs, like workshops on unconscious bias. |
| Health and safety in the workplace | Ensuring a safe work environment, minimizing risks and hazards, and providing proper training and equipment. | Safety protocols. Develop clear safety protocols and procedures tailored to specific tasks or job roles, such as guidelines for operating machinery or handling hazardous materials. Safety training. Conduct regular safety training sessions, such as fire drills, first-aid training, and machinery operation safety workshops. Reporting. Create a reporting system where employees can easily report workplace accidents or hazards. This can include incident forms or anonymous reporting. |
Here are examples of companies demonstrating strong corporate social responsibility:
- Salesforce. Salesforce prioritizes employee well-being, providing unlimited paid time off (PTO) along with a substantial $1,500 to $2,500 monthly PTO package value. They also implement innovative practices such as “no meeting weeks” to address burnout.
- Tesla. Tesla is dedicated to employee safety, achieving a 50% reduction in injury rates per vehicle and maintaining a total recordable incident rate (TRIR) 5% below the industry average. They engage employees through safety programs and explore technology like exoskeletons.
Companies’ responses to social issues profoundly impact their reputation. For instance, Nike faced reputation challenges due to allegations of sweatshops, worker abuse, poor working conditions, and low wages. Despite audits and improvements, protests continued, highlighting the lasting impact such issues have on a company’s image and reputation.
ESG governance issues
The key ESG issues concerning governance are described below:
| ESG governance issues | Description | How businesses can address governance issues |
| Board diversity | Inadequate representation of diverse backgrounds on a board. | Diversity recruitment initiatives. Seek out diverse candidates through partnerships with organizations like theBoardlist, which connects companies with highly qualified female board candidates. Board succession planning. Enhance board succession planning by incorporating a strategy that identifies and prepares diverse candidates for board positions. |
| Executive compensation | Excessive executive pay is misaligned with company performance. | Performance-based pay. Implement performance-based compensation packages that link the payment of corporate leaders to measurable performance metrics. For instance, tie bonuses to achieving specific financial targets. Compensation committees. Establish independent compensation committees comprising board members with no financial ties to company executives. |
| Transparency and disclosure | Insufficient transparency in financial and sustainability reporting. | Reporting frameworks. Adopt recognized sustainability reporting frameworks like the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB) to guide the company’s disclosure efforts. Stakeholder engagement. Engage with shareholders, employees, and other stakeholders to gather feedback and assess their expectations regarding transparency. |
Examples of companies that have improved their governance practices include:
- Samsung. Samsung Electronics improved its governance practices by appointing independent board members and restructuring its business units to enhance transparency and reduce potential conflicts of interest among family members.
- Wells Fargo. Wells Fargo improved executive compensation governance by granting oversight
responsibilities to the Human Resources Committee of the Board. This committee now plays a vital role in establishing performance goals for Operating Committee members to align compensation with the company’s strategic priorities.
Good governance is closely tied to financial performance in organizations. Effective governance practices, such as transparent decision-making, can strengthen financial stability. For example, companies like Microsoft and Apple have strong governance structures that contribute to their sustained financial success. Conversely, companies with ESG issues and poor governance, as seen in cases like Enron and Lehman Brothers, can lead to financial crises and corporate collapses.
To ensure effective governance, it's essential to implement thorough evaluations of board effectiveness.
Learn how to measure board effectiveness in our article to enhance your organization’s overall performance.
ESG integration and ESG investing
The term ESG integration is closely related to ESG investing, meaning the practice of systematically incorporating environmental, social, and governance (ESG) factors into the decision-making processes of businesses and investment strategies.
ESG elements are integrated into investment decision-making through the analysis of ESG metrics. For this purpose, investors collect relevant data from sources like sustainability reports, third-party ratings, and company disclosures.
As institutional investors increasingly prioritize ESG factors alongside financial returns, ESG-focused investment strategies appeared. Let’s explore the most common:
- Negative screening. Negative screening, or exclusionary investing, involves avoiding investments in companies that engage in activities or practices contrary to ESG principles. Typical exclusions may target industries like tobacco or fossil fuels.
- Positive screening. Positive screening, also known as sustainability investing, involves selecting investments that meet specific ESG criteria. Investors actively seek out companies with favorable ESG profiles, emphasizing those that contribute positively to environmental, social, or corporate governance objectives.
- ESG integration. The strategy involves the incorporation of ESG data alongside traditional financial analysis when selecting securities. Unlike negative or positive screening, ESG integration focuses on financial material ESG information. These material ESG issues are those expected to significantly impact both corporate and investment performance.
To assess companies’ ESG performance and make better investment choices, ESG ratings and indices are used. These are standardized evaluations that simplify comparisons within industries. ESG rating agencies, such as MSCI, employ different methodologies, with some using a 0–100 scale (where a score of less than 50 is considered poor) and others categorizing companies as leaders, average, or laggards.
Challenges faced by companies and investors in addressing ESG issues
Let’s explore some common challenges faced by companies and investors in addressing issues with ESG.
| Challenge | Description | Solution |
| 1. Data availability | Gathering reliable and comprehensive ESG data can be challenging. Many companies lack standardized reporting, making it difficult for an investor to assess ESG performance. | Encourage companies to adopt standardized ESG reporting frameworks like GRI, SASB, or TCFD. |
| 2. Data quality and reliability | Obtaining accurate and reliable ESG data can be difficult, leading to challenges in assessing a company’s true ESG performance. | Invest in reliable data collection and reporting systems. Turn to trustworthy ESG data providers like MSCI or Sustainalytics to validate the data. You can also use data from these providers to cross-verify information. |
| 3. Greenwashing | Some companies exaggerate their ESG efforts, making it challenging for investors to identify genuinely responsible businesses. For example, brands like Volkswagen, McDonald’s, and Coca-Cola were accused of greenwashing. | Conduct thorough due diligence and scrutinize companies’ ESG claims. Regulators can enforce transparency and impose penalties for false claims through regulations like the UK Green Finance Strategy. |
| 4. Cost of ESG implementation | Implementing ESG initiatives can be expensive, which may deter some companies, especially smaller ones, from taking meaningful actions. | Explore cost-effective ESG measures such as energy efficiency improvements or waste reduction initiatives. Also, seek financing options like green bonds issued through institutions such as the International Finance Corporation (IFC). |
| 5. Impact measurement | Measuring the tangible impact of ESG initiatives on environmental and social outcomes can be challenging and subjective. | Set priorities and clear ESG goals and use KPIs such as reduction in carbon emissions or improved workplace diversity. |
ESG issue management: best practices and recommendations
Here are some recommendations for effective ESG issue management.
1. Think about the future
ESG investors are all about the big picture. To them, the here and now doesn’t compare to the happenings of ten years down the road. Some organizations get lured into short-term thinking and get stuck with shrewd investors who only intend to buy low and sell high.
Sure, investors — of any kind — seem ideal. However, those lacking ESG values aren’t investing in the well-being of these companies. Instead, they only care about the immediate bottom line and won’t give companies the support they need for lasting success. Whereas investors with strong ESG leanings regularly work with a company to aid in its growth.
2. Understand the current business climate
During the 2017 proxy season, State Street Global Advisors (SSGA) voted against the re-election of 400 corporate directors. Why would they do something so drastic? Well, the (former) directors failed to appoint women to their all-male boards.
The above story highlights how major institutional investors expect companies to uphold environmental, social, and governance standards. Ensuring that socially-and-diversity-conscious decisions are being made in the boardroom is a primary component of avoiding ESG-related issues.
3. Focus on customer expectations
Top-notch ESG standards don’t only attract talent and investors. Customers are highly aware of ethical, social, and environmental standards as well.
For instance, Starbucks couldn’t make waves in China for years, until they offered healthcare to its employees’ parents. After that unprecedented move, sales increased exponentially, and Starbucks has expanded to 2,000 stores throughout the country.
The regulatory landscape for ESG reporting
Governments and regulatory bodies around the world have recognized the importance of ESG reporting and are taking various measures to standardize it. This includes the development of:
- Regulatory mandates. Many governments have introduced mandatory ESG reporting requirements that compel companies to disclose specific ESG information in their sustainability reports. For instance, the European Union’s Non-Financial Reporting Directive mandates ESG reporting for large companies operating within the EU. The U.S. SEC has also been actively working on proposals to include certain climate-related disclosures in public filings.
- Standardization initiatives. International organizations are creating ESG reporting frameworks that provide a common language for organizations to communicate their sustainability performance. Examples include the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB).
- Disclosure guidelines. Governments and international bodies are issuing guidance on ESG disclosure to help organizations understand what to report and how to report it. The Task Force on Climate-related Financial Disclosures (TCFD) offers recommendations for disclosing climate-related risks and opportunities, while the United Nations Principles for Responsible Banking provide guidance for finance institutions on integrating ESG factors into their strategies.
These regulatory requirements impact both businesses and investors. For businesses, compliance efforts result in increased administrative and operational costs. Moreover, failure to adhere to these regulations can result in reputational damage and ESG legal issues and repercussions. On the other hand, organizations with robust ESG practices become more attractive to investors.
Investors, in turn, reap advantages from these regulatory changes. They gain access to more consistent and reliable ESG data, facilitating more informed investment decisions. Furthermore, ESG regulations encourage companies to integrate sustainability into their long-term strategies. This integration can potentially reduce investment risks associated with ESG considerations, offering investors the prospect of better risk-adjusted returns.
Key ESG trends to keep an eye on
Let’s explore key trends in ESG to be aware of in 2024, as suggested by PwC:
- Focus on ethics and integrity. Consumers, investors, and stakeholders increasingly base their decisions on sustainability and ethical criteria, with over 60% of people making purchasing choices aligned with these values, a trend growing by 10% annually.
- Supply chain security, resilience, and transparency. Sustainability and emissions reduction in supply chains are becoming key investment criteria, driving demand for transparency and risk management.
- Workforce transitioning. As industries move towards a net-zero economy, the trend of workforce transitioning is growing. This includes upskilling employees, fostering a sustainable culture, and embracing diversity. Companies with strong ESG performance will have an advantage in attracting and retaining talent as value alignment becomes increasingly important in the job market.
- First Nations inclusion and empowerment. Businesses should consider involving First Nations communities in their operations, especially in the growing clean energy sector. This involvement includes employment, procurement, and co-ownership arrangements.
- Expanding regulatory changes. As international standards for ESG reporting solidify, organizations need to clarify their perspectives and strategies, preparing for mandatory sustainability and ESG reporting requirements set to roll out in 2024.
Conclusion: offsetting ESG issues is vital to the long-term health of a company
Let’s summarize:
- ESG stands for environmental, social, and governance, representing criteria used to evaluate a company’s ethical and sustainability practices.
- ESG investing focuses on evaluating companies not only based on their financial performance but also on their ESG practices, aiming to align investments with ethical, sustainable, and responsible principles.
- ESG issues include environmental concerns like climate change and pollution, social issues such as labor practices and diversity, and governance issues like board diversity and executive compensation.
- Companies and investors face challenges in data availability, data quality, greenwashing, and measuring ESG impact.
- Governments worldwide are introducing mandatory ESG reporting requirements, standardization initiatives, and disclosure guidelines, impacting businesses and investors.
- Key ESG trends include a focus on ethics and integrity, supply chain security and transparency, workforce transitioning, First Nations inclusion, and expanding regulatory changes.
Don’t treat ESG issues as a simple tick-box. It needs to be a living, breathing entity that affects each decision made by a board of directors.
Explore how iDeals Board can empower and streamline your ESG practices, enabling more effective governance and sustainable decision-making.