Although discussions about ESG strategy typically center around publicly traded companies, it is relevant for private companies and family businesses as well. Even if private companies are not subject to the same regulations as public companies, expectations surrounding ESG can still have a significant impact. Therefore, private companies should start considering how to incorporate ESG strategy into their business plans.
The following five reasons emphasize why ESG is important for private companies:
1) Talent retention and employee expectations
As the pandemic has resulted in a talent shortage, employees are looking to work for organizations that align with their values. Millennials and Gen Zers make up one-third of the workforce, and 64% of respondents in a Cone Communications survey consider company values when taking a job. A robust ESG strategy is essential for attracting and maintaining a talented workforce.
2) Your customers and local communities want it
Consumers are more mindful when choosing products and services, and the conscious consumer of the 21st century considers ethics and sustainability. A 2020 Zeno study found that 94% of consumers want companies to have a stated social purpose that aligns with their values, and if the company does, customers are:
4 times more likely to purchase from the company.
6 times more likely to protect the company in the event of a misstep or public criticism.
4.5 times more likely to champion the company and recommend it to friends and family.
Private businesses can set themselves apart from other companies with their ESG commitments, and such commitments can help establish private companies in the local communities they operate in.
3) Access to capital could increasingly depend on a sound ESG strategy
Having a well-planned ESG strategy could impact a private company's access to capital. Lenders and investors are increasingly linking ESG metrics to the allocation of capital, and "green" lending can create opportunities for lower cost of capital if borrowers can demonstrate financial commitment to ESG. Private equity groups have emphasized ESG metrics, such as diversity in leadership and greenhouse gas emissions. Furthermore, more companies are committing to the Principles for Responsible Investment (PRI), which mandates specific goals and reporting. Examining the ESG statements of lenders and investors can provide insight into their expectations.
4) Financial performance and long-term value creation favors those with a robust plan
Companies with robust ESG programs outperform peers without them, and ESG measures enhance factors like risk management and innovation. With a solid ESG plan, companies can facilitate top-line growth, minimize regulatory and legal interventions, reduce costs, optimize investment and capital expenditures, and increase employee productivity.
5) A changing regulatory landscape could subject private companies also
At the moment, ESG (and, more specifically, climate change) regulations have most heavily impacted public company operations. But private companies that hope to go public have a chance to get ahead of regulation and begin compliance sooner than later to prepare for future transitions. President Joe Biden's executive order on Climate-Related Financial Risk allows the government to measure and report on climate-related financial risk in government contracts so that regulators can assess private companies on sustainable business practices.
Getting started
Each company needs its own tailored approach of ESG planning and for many private companies, it may be a challenge to determine how to start. An ESG materiality assessment can help private companies identify where they are in terms of ESG, where they want to be and how to get there. A key consideration is for private companies to approach ESG not just as a way of checking boxes, but also as a way of considering and committing to sustainable business practices.