What are ESG impacts and why they matter to businesses?
Statistics show that as consumers’ concerns over the negative impacts businesses have on the planet grow, more and more of them feel they could make a positive difference to the world through their purchase choices. How businesses manage its impacts and communicate their efforts in doing are now essential for sustaining growth.
What Are Impacts?
The United Nations defined impacts as “along-term change in an outcome (aspects of wellbeing) caused by an entity’s actions or decisions”. Putting this in the business context, impact means the effect an enterprise has or could have on the economy, people, and environment. An impact could be positive or negative, short- or long-term, intended or unintended, remediable and irremediable. How an enterprise manages its impacts indicates its contribution to sustainable development.
According to internationally recognised standards and frameworks, including the United Nations Guiding Principles on Business and Human Rights, and the GRI Standards, an enterprise can either cause, contribute to, or be directly linked to an impact, indicating varying degrees of involvement the enterprise has with the creation of an impact.
- When an enterprise causes an impact, its activities result in this impact.
- An enterprise contributes to an impact, if
- its activities lead, facilitate, or incentivise another entity to cause the impact
- its activities cause the impact in combination with another entity’s activities
- actions could have been taken by the enterprise to prevent or mitigate an impact directly linked to that enterprise but it fails to take any of such actions.
3. Direct linkage to an impact means an enterprise’s products or services are directly linked to that impact through business relationships (such as raw material suppliers). An example of this is when a company’s products is manufactured with suppliers’ materials that are produced or harvested through child labour.
Why Do Impacts Matter to Businesses?
Understanding impacts and effective management of impacts help ensure that companies do not miss out on market growth potential and new capital.
Every business creates or facilitates the creation of impacts, hence, companies have the responsibility to manage the impacts they cause, contribute to, or are directly linked to. Such an expectation for businesses to manage their impacts has translated into growing consumer awareness and initiatives for authorities to establish relevant regulations (such as corporate ESG disclosures). This has rendered sustainability both a business disruptor (given risks that come with rising regulatory pressure) and a driver of business and investment value.
In terms of business value, there is immense market potential of sustainable products and services, as they are now worth of over US$12 trillion. But to convince consumers that products and services are sustainable, transparent and effective communication of businesses’ impacts and management of impacts are indispensable.
In terms of investment value, rating agencies like Morningstar now consider ESG metrics when assessing companies’ financial standing and investors are now also increasingly seeking to understand and shape impacts of their investment portfolios. More than one-quarter of global investments now fall under the category of ‘sustainable investing’, with nearly 70% of investors prioritising investees’ contribution to the UN Sustainability Development Goals (SDGs) when deciding on their investment portfolios. According to Gartner, more than 90% of banks and insurers are monitoring ESG, as impacts affect insurance limit coverage, financial ratings, and investment decisions.
In summary, it has become an imperative for businesses to understand and track their impacts, as doing so facilitates long-term growth.
