Why Are Sustainable Business Practices Important?

Reporting and disclosures for environmental, social and governance (“ESG”) integration in the United States are evolving to include information surrounding sustainable business practices, while other parts of the world are already required to report on ESG information. Sustainable business practices are those that help companies conduct business, while being socially responsible and environmentally friendly. Awareness surrounding a company’s sustainable business practices is increasing – but why are these practices important?

Sustainable business practices – part of the “E” in ESG – are important for companies to consider now to stay relevant for the future. Through technology and increased transparency, investors and consumers both have more insight into materials and processes utilized in company operations as well as their supply chain, which they consider when making investment and purchasing decisions. As younger generations join the workforce and/or look to invest, they are more likely to focus on being healthy and environmentally friendly.  Overall, there is a rise in public interest towards sustainability, part of a movement referred to as an ‘eco-wakening’ in a report published by The Economist. To attract and retain investors, employees, and customers, implementing sustainable business practices is the path forward. By disclosing a company’s ESG and sustainable business practices, it makes the information available to aid in the decision-making process for those individuals and could be the differentiating factor that sets one company apart from another.

Regulators are also putting more emphasis on sustainable business practices. In a series of speeches, SEC Chair Gary Gensler shared that he “asked staff to put together recommendations on mandatory company disclosures on climate risk and on human capital.” Gensler also noted that “investors are looking for consistent, comparable, and decision-useful disclosures so they can put their money in companies that fit their needs.” Gensler added: “I believe the SEC should step in when there’s this level of demand for information relevant to investors’ investment decisions.” Further supporting this trend, in September 2021, the New York Stock Exchange developed a new investment opportunity called a natural asset company (“NAC”) to support sustainability initiatives.

So, why are sustainable business practices important? A company who is proactive regarding their sustainable business practices will be more attractive and responsive to mitigating risks, which can include resource constraints as well as trouble attracting investments and retaining employees. As companies give more attention to their own sustainable business practices, they will want to work with suppliers and service providers that are similarly focused on sustainability. Tackling ESG head on can lead to increased financial performance and help prepare your company for implementation of potential future regulations.  Now is the time to consider your company’s sustainable business practices and how implementing ESG business standards can help.