When engaging in strategic planning, business owners and their leadership teams must consider various factors. These commonly include the state of your industry, the national and local economies, the company’s financial position and cash flow, and opportunities in the marketplace.
However, in today’s world, where transparency is everything, another factor that may be important for some companies is a clearly defined approach to environmental, social and governance (ESG) issues.
3 areas of focus
As a general concept, ESG (as it’s often called for short) focuses on three areas:
1. The environmental component considers your company’s impact on the environment, including the energy it uses, the waste it produces and the resources it consumes.
2. The social element examines your business’s relationships with people, communities and institutions. It includes fair labor practices; worker health and safety; diversity, equity and inclusion; and your company’s impact on the people of the community or communities where it operates.3. The governance portion includes policies, practices and procedures your business adopts to govern itself. Considerations include ethics, transparency, legal compliance, executive compensation, supply-chain management, data protection, and product quality and safety.
The idea is that, to be a good “corporate citizen,” it’s important to recognize the impact of your company’s activities on the environment, the people it employs and those it interacts with. And it’s equally important to implement business practices that minimize potentially adverse effects.
Not everyone agrees on the importance of ESG. However, as mentioned, businesses of certain types or in certain areas may find themselves under pressure from various parties to implement ESG initiatives.
For starters, some customers are increasingly considering ESG — particularly environmental impact and fair labor practices — when making buying decisions. Similarly, certain investors are making ESG performance a priority when deciding whether and how to invest their capital. These stakeholders may be interested in not only how your company handles ESG, but also how your suppliers and other business partners do as well.
Moreover, many governing authorities at the global, national, state and local levels are prioritizing ESG. A business could incur costly fines and reputational damage for not complying with laws or regulations related to:
- Environmental issues such as pollution and carbon emissions,
- Social issues such as labor relations, worker health and product safety, and
- Supply-chain issues such as human rights violations and the use of conflict minerals.
In addition, public entities may impose ESG standards that go beyond the legal requirements on certain projects. This can seriously impact businesses that rely heavily on government contracts.
Changes in the labor force may also have an impact. Generally, younger workers tend to consider a potential employer’s ESG practices when deciding where to work. And employees of all ages are increasingly more attuned to whether a company mindfully handles the many issues involved. In short, ESG may affect hiring and employee retention.
Something to think about
As you and your leadership team check in on this year’s strategic goals and develop new ones, you may want to assess whether and how ESG might affect your company. It’s something that many businesses are focused on — and you just might discover some ways to differentiate yourself from the competition.
To manage financial risks, specifically, contact Cordia to work with your CFO or financial executive to assess the state of your financial reporting, data recording, and performance of your accounting team. Contact us for a diagnostic assessment and let us provide recommendations on how to improve the efficiency and productivity of your accounting team, while reducing risk.