Environmental, Social, and Governance: A Practical Guide for Business Owners to Build a Sustainable Business
Climate change has certainly taken a toll on every aspect of human life. However, it has disproportionately affected marginalized and vulnerable communities around the world. They are the least to contribute to climate change, yet they bear the brunt of climate change the most. Living below the poverty line is already difficult. Imagine having to worry about where to sleep, what to eat, and how to collect money; every second, every day.
In addition to that, the aggravating condition of the climate has worsened their condition. With continuous flooding, uncertain weather, and lack of clean water, among many other issues, they now have to worry about their fundamental existence–whether they are going to survive and live tomorrow or not. In short, climate change is–as previously mentioned in our microblog–an exemplary form of injustice.
Giant corporations and business owners are on the top of the answer list regarding who should be responsible for climate change. In a 2017 report by Carbon Disclosure Project, it is shown that only 100 big firms alone contributed to 70% of industrial greenhouse gas emissions. Meanwhile, there are thousands of giant businesses all around the world. Imagine their environmental impact, assembled.
However, some people are getting even more conscious than before. They realize that this planet is dying and needs immediate saving. From laypeople, scientists, to politicians, they speak up and make their voices taken into account. Society has become more selective and mindful in its consumption as well.
People are starting to buy from local brands, minimize their single-plastic use, and even start to implement environmental, social, and governance (ESG) investing. Youth all around the world is getting more conscious than ever about where they invest their money. ESG investing is a topic of conversation among the next generation of investors. A 2019 study conducted by Morgan Stanley Institute reported that around 95% high net worth millennials exhibit an interest in sustainable investing that considers the ESG track record of the company.
So… what is ESG investing?
ESG investing is often used synonymously with sustainable investing. It is a vital variable that is used by investors in their decision-making process, to consider whether or not to invest in the company. As the name suggests, investors would heavily consider the company’s environmental, social, and governance records in their decision. They need to ensure that they invest in an environmentally and socially responsible company. ESG investing is not sustainability per se, but it is a path towards sustainability.
The environmental record would represent the company’s interaction with the physical environment. How much energy is used? How much waste and pollution is produced? Do they conduct tests on animals? Do they assess their environmental risk and manage it? A good environmental record would show the company’s positive contribution to the environment (e.g. zero waste, zero emission).
The social record would represent the company’s interaction with the society - from their suppliers to the local communities that surround them. Do they work with suppliers that share aligning values? Do they protect the health and safety of their employees? Do they abide by the labor standards? Are there any programs designed to empower local communities? Human rights and welfare should be the company’s top priority to have a good social record.
Meanwhile, the governance record would give an overview of how the company is governed. Companies with good governance records would demonstrate accountability, generate accurate and transparent accounting and reporting, as well as promote ethics in the workplace.
An American-based financial firm, Morgan Stanley Capital International (MSCI) also added that there are three approaches to defining investors’ behavior towards ESG investing:
Value-based investing
They are value-driven investors. They will choose companies that possess aligning ethical values. This kind of approach may also generate a value-driven exclusion where investors would avoid investing in a company with certain practices (e.g. religious, cultural, ethical, environmental) that are against their values
Impact investing
They are impact-driven investors. They will focus on the positive environmental and social impact generated by the company. They usually invest in companies that share aligning purpose and mission
ESG integration
They are visionary investors. With ESG as a baseline, they will assess long-term financial risks and opportunities to generate a sustainable portfolio that will enhance their long-term returns.
How do you, as business owners, stay relevant to the market’s new investing approach?
With the growing awareness of ESG investing, business owners should rethink how to conduct their business to stay relevant to the market’s demand for their business practices. In 2015, sustainable funds only attracted less than US$5 billion. But data shows that in 2020, this number has sprung up to US$51.1 billion. This number resulted from the millennials’ investing behavior.
Here are several ways that can be implemented by both local businesses and giant corporations to have a good ESG track record.
Get certified, sustainably!
Claiming to be a green business seems easy, but proving to be one might be quite a journey. With the increasing awareness of greenwashing, the market is getting more skeptical and ambivalent of the green claims made by corporations. The taglines commonly used by giant businesses such as “zero waste”, “100% organic”, or “animal-free” are meaningless without any living evidence. Such terms often have no universal and legal definition which makes this issue a complicated gray area. Hence, with the non-existent green regulation in many countries, the presence of third-party certification is imperative to reinforce a business’ green claims.
As the name suggests, green certification or synonymously sustainable certification is an instrument to demonstrate that a business is actually green. It ensures an environmentally friendly business operation. How does the certification work? Business owners will typically go through a series of assessments that evaluate various variables that will impact the environment and the community. For example, in terms of environmental impact, it will assess energy efficiency, carbon emission, and waste strategy. On the other hand, assessing the social impact would include the assessment of human rights, child labor, and community welfare.
Dozens of sustainable certification initiatives are generated by various organizations. The types of certification also vary. There are certifications for building designs, food products, industrial products, and business practices. However, three certifications are more widely recognized:
Leadership in Energy and Environmental Design (LEED)
Generated by the U.S. Green Building Council (USGBC), LEED has certified more than 100,000 buildings all over the world, as of 2021. The LEED rating system aims to promote green buildings that bring health and environmental benefits. LEED certification is critical to climate action and obtaining ESG objectives.
Since 2006, B Lab has assessed and given certification to B Corporations. B Corp certification is to recognize companies with proven commitment and dedication to serving social and environmental purposes while generating profit. Additionally, accountability and transparency are also key variables of a B Corp. Through numerous standards, policies, tools, and programs, companies are evaluated carefully. It will be then determined whether or not the company has harnessed its potential to create a positive impact and address critical challenges around them.
Forest Stewardship Council (FSC)
With the acknowledgment from an international body under the United Nations, World Wide Fund for Nature (WWF), FSC certification has its power as a gold standard for eco-friendly products. FSC certification focuses on sustainable forest management. It ensures that the woods utilized in certain products are sourced ethically from forests that are managed responsibly and sustainably.
Collaborate with suppliers
You may have done your best to keep your business practices as sustainable and green as possible. But when it comes to suppliers, it might be out of your control. Nonetheless, you can always choose to collaborate with them to some extent. Reinforcing audit reports such as due diligence might ensure your suppliers’ engagement to implement sustainable and green practices in their business.
For example, a recently B Corp-certified fashion social enterprise, SukkhaCitta collaborates intensely with the local community to produce a garment that is ethically sourced and made. SukkhaCitta empowers local farmers to implement regenerative farming, delivers training and education to local women (Ibus) about handcrafting, provides living wages for everyone in their supply chain, and ensures that there are no toxic chemicals used along the cloth production process. From farm to the closet, SukkhaCitta builds a fashion ecosystem that is entirely green and ethical. They have shifted old practices in the local community that was not environmentally nor socially friendly to new practices that implement environmentally and socially friendly practices.
SukkhaCitta’s documentation on sustaining culture (doc/SukkhaCitta)
Another alternative is to work only with like-minded, conscious, green suppliers. Avoid working with suppliers that are harmful to the society and environment. For example, fashion business owners should cease to work with garment suppliers that release hazardous toxic to their employees and water sources. Such practice may encourage conservative suppliers to shift their practices into sustainable ones. This approach is particularly optimized when implemented by giant corporations or a joint of local businesses.
For instance, Little Spoon Farm partners with local organic farmers to deliver nourishment to the community. Little Spoon Farm goes beyond just working with them and providing working opportunities for the community. They also collaborate with other local farmers and empower them to shift to regenerative farming. By having the standard of organic farmers as suppliers, Little Spoon Farm can convert other local farmers to fulfill the standard and by doing so, includes the farmers in a more sustainable food chain.
Farmers planting sprouts (doc/Greta Hoffman from Pexels)
Working with suppliers whose practices are against your value means that your company practically still supports damaging business practices. This will eventually impact your business and brand image. Staying transparent is therefore vital to give a clear and authentic view of your business canvas to the customers so that they know what products they buy, how they are made, and who made them. Making a who-not-to-work-with list might also help you as business owners to ensure that you are on the right path towards a good ESG track record.
Triple bottom line (TBL) accounting
The triple bottom line might already be familiar to some of us. It is a common framework utilized by organizations and corporations that incorporates and measures three interrelated dimensions of profit (economy), planet (environment), and people (social). But how can you business owners measure these variables? Defining the TBL is quite simple, but measuring it is beyond complex. Profit can be measured with the unit of currency (i.e. dollar, euro, pound sterling, rupiah) and it can be generated from various sources (i.e. return of investment, headcount growth). But what about the planet and people? They have no specific unit of measurement.
Breaking down the planet and people into smaller variables might help. You can then quantify each variable. Hall and Slaper suggested several examples of environmental and social measurement*:
Social measures
Unemployment rate
Female labor force participation rate
Median household income
Relative poverty
Percentage of population with a post-secondary degree or certificate
Average commute time
Violent crimes per capita
Health-adjusted life expectancy
Environmental measures
Sulfur dioxide concentration
Concentration of nitrogen oxides
Selected priority pollutants
Excessive nutrients
Electricity consumption
Fossil fuel consumption
Solid waste management
Hazardous waste management
Change in land use/land cover
*only examples, you can adjust accordingly
Although it is quite complex, TBL is essentially fulfilling the objectives of ESG. It even walks in line with ESG. It can bring added value to your business which therefore will do good for your business performance.
If you are just kickstarting your business and the aforementioned methods feel too difficult and complicated for you to implement, worry not - there are other ways! You can find a list of questions on our INKURI page (for the Indonesian version) or below (for the English version):
For the environment
Does your business use renewable energy in the production process?
Does your business manage production waste?
Does your business seek to preserve natural resources/biodiversity?
Does your business educate the people about the environment?
Does your business calculate the carbon footprint and do an offset?
Does your business source material that is ethical and sustainable?
For the people and community
Does your business pay well and provide health benefits?
Does your business strictly prohibit child labor?
Does your business provide equal opportunity for all gender and people with disability?
Does your business collaborate closely with the local community?
Does your business seek to fund nonprofit organizations, communities, or projects?
Does your business source material from the local community?
Does your business provide training and capacity building for your employees?
For the consumers and a good governance
Does your business provide sufficient information about your production process?
Does your business use materials that are proven to be safe?
Does your business reach the underserved community in rural areas?
Does your business periodically evaluate the consumer satisfaction rate?
If your answers are mostly “yes”, then congratulations! You are one step closer to becoming a sustainable business.
The road toward ESG is not easy. Sustainability indeed comes at a certain cost. But if executed properly, ESG can really foster a positive impact both on the business performance and the major variables within (the environment and the people). Your business can start small - even fulfilling the questions provided is a good first step. Fulfilling one tiny step is better than doing nothing at all. After that, you can build up to bigger steps. All in all, your business will be rewarded - just remember the rule of thumb: do well by doing good.
We are currently working with numerous organizations across Indonesia to build an ESG guidance for Indonesian MSMEs to push their ESG readiness through the Ekonomi Membumi Coalition. Read more about it in our previous blog and stay tuned because we will be escalating our impact soon!