With the world facing significant environmental, social, and governance challenges, businesses have a responsibility to improve and implement their ESG commitments...
The term ‘ESG’ (Environmental, Social, and Governance) is used to refer to a set of criteria that are used to evaluate a company’s performance in these three areas.
- The environmental factor looks at how a company manages its impact on the environment.
- The social factor evaluates how a company treats its employees, customers, suppliers, and communities.
- The governance factor assesses how a company is managed and governed, including its policies on ethics, transparency, and accountability.
Why are ESG policies gaining momentum?
These policies are gaining momentum in the business world, due to several factors including investor demand, regulations and policies, incentives and the recent growth in conscious consumerism.
Consumers are increasingly concerned about the social and environmental impacts of their purchases. In 2021, Accenture reported 62% of global consumers wanted companies to take a stand on current and broadly relevant issues like sustainability, transparency, or fair employment practices. Hence, consumers are more likely to buy from more ethical businesses and are increasingly concerned with a company’s social and environmental impact. A similar study from Savanta’s Eco Segmentation report also found that a quarter of consumers (24%) solely purchase from those who they see as ethical and committed to having a positive impact.
Surveying 1,000+ UK business decision-makers in the latest poll from our UK Business Tracker, over a quarter (27%) of businesses say they have no plans to introduce an ESG policy, with over a third (36%) being unfamiliar with the topic. Suggesting that despite this being front of mind for consumers, a significant portion of brands are due to ‘read up’ on the subject.
Are businesses exploiting consumers’ demand to shop ethically?
However, the data from our Business Tracker also reveals that businesses may be aware of shopper desire to consume “consciously” and are exploiting it.
One in five (23%) decision-makers feel that introducing or acting on their businesses’ ESG policy is not a priority, and three in five (59%) agree that businesses use ESG policies to promote their image without taking any real action.
Not only are such actions misleading but they can also seriously harm a brand’s reputation and sales. Fast-fashion giant, H&M, faced criticism in 2021 for sourcing cotton from Xinjiang, where human rights abuses were reported, despite publicly committing to ethical and sustainable sourcing. This controversy led to a drop in sales in China, one of their largest markets, and calls for boycotts. It highlights the importance of businesses acting in line with their environmental and ethical claims, and the risks associated with social washing.
Are ESG policies feasible for all?
Effective implementation of ESG policies is not without its challenges though. Companies often struggle to balance the need for improving their social and environmental impact with generating profits for their shareholders, as monitoring and evaluating the effectiveness of ESG policies can be time-consuming and expensive.
Another obstacle is the difficulty in measuring and reporting ESG performance, especially for companies lacking the necessary data and expertise.
Despite these hurdles, businesses that successfully implement ESG policies can enjoy improved brand reputation, customer loyalty, and financial performance. The benefit of sustainable branding is exemplified by the success of eco-conscious companies such as Lush, who, according to data from BrandVue, Savanta’s market intelligence tool, has received a high level of brand affinity among 66% of their customer base and are trusted by a quarter of their users.
However, smaller businesses may struggle to introduce ESG policies due to limited resources. Data from our UK Business Tracker highlights that over a third (35%) of decision-makers agree that ESG commitments should be mandatory only for businesses above a certain size. This demonstrates the understanding within the business community of the limited resources and abilities of smaller businesses to effectively implement these policies.
In turn, this may make it difficult for smaller businesses to compete with larger companies. Therefore, in evaluating a company’s commitment to ESG, it is important to consider the difficulties and constraints that may be faced, especially for smaller businesses.
There is a need for greater awareness and genuine commitment to ESG policies amongst business leaders. With the world facing significant environmental, social, and governance challenges, businesses have a responsibility to improve and implement their ESG commitments, rather than using policies as a tool for image promotion.
Businesses that successfully implement ESG policies stand to gain several advantages such as an enhanced brand reputation, customer loyalty, and improved financial performance. These benefits have been affirmed by the Savanta Eco Segmentation report, where consumers identified ‘customer perceptions’ (33%) and future growth (32%) as the most significant positive outcomes of sustainable business practices. This reinforces the notion that robust ESG policies can be advantageous for businesses in the long run.