What is ESG?
Environmental, Social and Governance (ESG) is derived from the concept of Corporate Social Responsibility. This is the notion that businesses have a responsibility to contribute to the betterment of society, and dates back to the nineteenth century. The term ESG, was however first introduced more recently in 2004, in a U.N Global Compact report, as part of a global initiative for systemic change in favour of the sustainable development of societies, through integrating ESG factors into investment decisions.
Today, ESG has evolved into the primary framework used by businesses to measure the risks and opportunities inherent in their operations, in an effort to assess the full impact of their activities, It involves scoring against globally-recognised standards,, which enables businesses to objectively measure, monitor and report on their sustainability performance. The goal of ESG is not to restrict a business’ prospects, but to strengthen and boost resilience, thereby securing a more sustainable future for stakeholders.
A business measures its impact using the three 'pillars' of ESG, which may be summarised as follows -
Environmental - Its impact on the planet, in terms of carbon emissions, pollution, waste, and its stewardship of natural resources
Social - Its purpose and values, and how it positively contributes to the lives of its employees, customers, and other stakeholders
Governance - Its internal management practices and procedures, leadership structure, and how it is managed and directed.
The ESG Emergency
Due to the current macroeconomic climate emergency, it is no longer sufficient to passively address ESG issues, ESG has become
a existential priority, and businesses in every sector are being faced with increasing pressures to do business more responsibly. More and more companies are rising to the challenge to make a commitment to ESG that covers not only the environmental, but topics including: DE&I, employee engagement, philanthropy, and others. However, a commitment to ESG should not merely be about meeting a set of requirements, but about taking purposeful action to make a tangible difference for the benefit of all.
Whilst at the present time, only large companies and listed companies (except listed micro-enterprises) are mandated to disclose sustainability-related information in their annual strategic reports, a growing number of small and medium-sized entities (SMEs) have started to face increasing pressures. This is because lenders and larger organisations are being made to pursue ESG factors and provide sustainability information along their supply chain. Amid growing speculation that SME legislation will be introduced in the near future, SME early adopters are already benefitting and stand to gain further advantage from having historic ESG data.
The Benefits of ESG
Many business owners are astounded to discover that implementing a sound strategy for ESG delivers tangible benefits - not only for the environment and communities, but also for the business itself. When it is done right, sustainability practices yield positive outcomes - and whilst some are realised over time, some rewards may be enjoyed immediately. Today, a growing number of individuals are paying attention to companies’ ESG strategies, practices, and performance, when deciding who to conduct business with, partner with, or invest with.
The benefits of ESG are extensive and comprehensive when compared with its costs, and may include: competitive advantage, higher sales and customer loyalty; reduced overheads, employee acquisition, retention and engagement; commercial advantage, ESG-focused investment, business resilience, and more.
When categorised under the three pillars of ESG, this includes -
Environmental - A more efficient use of energy and materials, which translates to lower overheads, as well as lower emissions and reduced climate impact.
Social - A socially responsible culture which helps to generate higher sales from ESG-conscious consumers; and attracts employees, as well as supporting retention rates and better employee engagement, which boosts productivity and output.
Governance - Robust internal controls and risk management practices which help to boost business resilience and strengthen its overall performance.
ESG x Luxury
When Bernard Arnault auspiciously described ‘'The Perfect Paradox of Star Brands’ in his stellar HBR interview in 2001, we might safely deduce that ESG was, at that time considered a minor topic, if it was considered at all. Today, a repeat of that discussion would undoubtedly highlight the paradox that ESG represents to luxury brands. The heightened prominence of sustainability means that luxury business are rallying to brace themselves, to confront this delicate topic with utmost diligence.
The luxury sector must find inventive ways to dissociate from outdated notions of luxury, and reinvent to exude excellence across its entire value chain - from how it sources raw materials, and treats its end-to-end workforce, to how it contributes to the wider society. The sector in turn is evolving; inspired by the strong new wave of social change, and influenced by modern values and the pursuit of an elevated, conscious lifestyle. As it evolves, it proves its timeless relevance and resilience.
Walpole, the official sector body for UK luxury, set out a firm commitment for the sector, as described in the British Luxury Sustainability Manifesto, produced in partnership with McKinsey. The report puts forward ambitious industry aspirations to: lower carbon emissions, reduce the impact on the environment and ensure a more sustainable path for future growth. It highlights the sector's opportunity and responsibility to play a key leadership role in the shift towards a more sustainable future for all.
The sustainability pledge outlines clear guidelines which are aligned to 11 of the 17 UN Sustainability Goals, and seeks to envision the global challenges and solutions that will define the future era for luxury. Underpinning the policy are four guiding principles which are to - Lead the transition towards a circular economy | Safeguard the environment and natural resources | Guide partners + suppliers towards sustainable practices | Advocate equal and respectful working conditions.