What is ESG Performance and Why is it Important?

By Danielle Garcia and Sudheer Ballare
December 7, 2021

Impacted in 2021 by climate change, loss of biodiversity, racial inequality, poor working conditions, and finally by COVID-19, industries and companies of all shapes and sizes are taking a closer look at the way they conduct the future of their business. From local coffee shops to Fortune 500 tech giants, businesses and sectors around the world are stepping up their efforts to identify and measure their functionality, build their resilience, and enhance their reputation through greater commitment to sustainable value creation and improved reporting to their stakeholders. For a large number of companies, this means looking at their bottom line, the environmental impact and lifecycle of their products, their organizational culture, and how well they are adapting to this era of change and holistic sustainability.

A key step in the right direction for most companies (including Cumming) is to proactively transition from solely managing their financial performance to also managing their Environmental, Social and Governance (ESG) performance. Not only is this the right thing to do, but it’s also good for business.

So what exactly is ESG performance? According to our own Vice President of Energy & Sustainability, Christine Marez, an organization’s ESG performance focuses on “nonfinancial” performance indicators that measure a company’s approach to responsible operations, governance mechanisms, and its holistic impact on society and the environment. In simpler terms, ESG performance can be viewed and understood through its three components: Environmental, Social, and Governance. Let’s take a closer look.

Environment: How does a company act as an environmental steward?

There is only one place that we call home: planet Earth. We have a responsibility to restore and maintain the Earth and its resources to a level that will sustain life both now and in the future. The environmental component of ESG examines how well a company identifies, assesses, and manages its environmental impact, such as its contributions to climate change, air and water emissions, resource depletion, waste, and overall pollution. Identified issues can include air and water pollution prevention, energy efficiency, waste management, and climate resiliency.

Social: How does a company treat its employees, customers & local communities?

The social component of ESG can be classified into human and social capital management. The human capital aspect refers to the workplace environment (i.e., working conditions, health/safety, diversity, etc.), while the social capital aspect refers to factors outside the workplace (i.e., community engagement, volunteering, skill-building, etc.). In this analysis, companies will need to take a step outside of their comfort zone to really look at how they manage their relationships with their workforce and the communities in which they operate. There are many different social factors that can affect a company’s performance over the short- or long-term, including diversity and equality of opportunity, employee attraction and retention practices, human rights, customer satisfaction, and much more.

Governance: How does a company govern itself?

Lastly, but no less important, is the corporate governance component, which pertains to decision-making, ethical business behavior, and responsible corporate activity. A company’s purpose, the role and makeup of its board of directors, shareholder rights, regulatory compliance, and internal governance mechanisms are core elements of corporate governance structures. Companies often review and provide information on certain governance factors, including risk management, business ethics, and accounting standards.

The time for deeply integrating all three ESG components into company cultures is here. Consumers, clients, and stakeholders from all industries are increasingly scrutinizing company narratives and actions regarding environmental, social, and governance issues. According to Bloomberg, managed ESG assets are expected to exceed $50 trillion by 2025, representing more than a third of the projected $140.5 trillion in total global assets under management. Additionally, some of the world’s largest asset managers are taking a proactive stance on issues across the ESG spectrum and continue to drive the conversation around transparency of company processes. Earlier this year, BlackRock’s CEO Larry Fink urged companies to be more upfront about their strategies for contributing to a “net zero world” (a proactive stance in working with countries to lead a global transition to net zero emissions by 2050). COP26 additionally has encouraged the private sector to do more on reporting their performance in mitigating climate change. As we head into 2022, these issues are projected to be more important than ever, with investors continuing to press companies on social issues, specifically around COVID-19, equity and diversity, and worker safety.

The ESG frameworks provide companies with the tools needed to properly communicate how they are integrating ESG considerations into their processes, while still meeting all other business expectations. There are several guidance frameworks and standards available for organizations to report their ESG performance. Some of the more popular ones include The Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the Carbon Disclosure Project (CDP), and the Taskforce on Climate-related Financial Disclosures (TCFD). The availability of ESG guidance frameworks is anticipated to continually increase in response to drivers such as regulatory, stakeholder, and consumer demand. In turn, the quality of ESG data will subsequently improve.

Cumming offers a suite of ESG services through its Energy and Sustainability Group, including materiality assessments, gap analyses, stakeholder engagement, data management, assurance, and ESG reporting. As we head into a new year full of new opportunities, goals, and possibilities, it is important to keep sustainable value creation in our minds. It is up to us to make an impact in 2022 by looking beyond the past and striving for a truly more sustainable and inclusive future.