There is a new term entering the small business dialogue called “ESG,” which is short for Environmental, Social and Governance. ESG is a non-financial metric that examines the operations of a business through the lens of the company’s social and ethical relationships to its environment, its stakeholders and the community at large. These metrics can be utilized to determine an “ESG rating policy,” and many investors are now analyzing the ESG rating of a small business to determine its long-term potential.
An ESG rating measures a company’s exposure to long-term environmental, social and governance risks. These risks have financial implications, and they involve issues such as energy efficiency, worker safety and board independence. But they are often not highlighted during traditional financial reviews and vary from company to company.
One of the reasons small businesses may not implement an ESG rating policy for their operations is they feel that they lack the resources larger companies have or the effort required for ESG initiatives outweighs the potential positive impact. But, implementing an ESG policy, even on a small scale, can benefit a business of any size.
Your ESG rating policy includes three major elements: 1) Environmental, 2) Social and 3) Governance. The environmental element measures the impact your business has on nature and the environment, especially with respect to climate change. The social element measures how a business handles its relationships with people — its employees, partners, vendors, suppliers, clients, customers and members of the local community. The governance element is the collection of systems by which a business manages itself and the processes by which it provides oversight for its operations. Good corporate governance assures that a company remains accountable to its stakeholders.
Here are five ways an ESG rating policy can help your business.
- Attracting and retaining talent for your small business. Having an ESG rating policy can help attract and retain social a socially conscious talent pool by promoting employee well-being to prospective employees while also lowering employee attrition rates.
- Improved company brand value. Developing an ESG program can enhance your company’s brand value and reputation among consumers by aligning with customers who consider ethical spending and are looking more closely at the practices of the companies they support. Even a small-scale program can have a big impact on a small business.
- Improved financial performance. Multiple studies have linked ESG initiatives to improved financial returns, largely due to factors such as improvement in innovation, operational efficiency, risk management, stakeholder relations and firm reputation.
- Attract investors and increase capital to grow. If your company is interested in the private equity or venture capital space, a strong set of ESG policies is a way to help differentiate your business. Many investors weigh in ESG criteria when evaluating investment opportunities, and analyze more critically about the environmental and social impacts of their investment choices
- Better control and management of risk. ESG policies can help a small business be proactive to legal and financial risks related to ESG, such as improper waste disposal, chemical spills, improper management of employee harassment claims, and quality control of products sold to customers.
When a small business takes the time to analyze the three elements of ESG, it can put them on a clear path to grow sustainably. For most businesses, profit is a critical factor for survival. By implementing sustainability practices, a small business will always have options to operate sustainably without compromising on its ability to generate profits and survive.
Start your journey to going green in your small business by exploring the . Learn how you can transform your small business by joining the #GreenBizAZ movement and earn a free certificate online. This program aims to educate small-business owners in sustainable business practices for a cleaner, greener future in Arizona.
EDGAR RAFAEL OLIVO is a bilingual business educator, economic advisor, and contributor for several media outlets. He’s a nonprofit executive who is passionate about education. He is certified in finance and data analytics and holds a business degree from Arizona State University.
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