What are ESG criteria?
Buzzwords come and buzzwords go, but one term that's here to stay is “ESG”.
First used in a responsible investing guide in 2004, ESG stands for Environmental, Social, and Governance criteria, a way for investors to consider the value of a company in terms of its social and environmental impact.
Twenty years later, the importance of responsible business practices has been firmly established, and ESG criteria aren’t just for investors anymore. More and more businesses are realising that doing well on ESG criteria stands to make them more resilient, more efficient, and better at managing risk.
We pride ourselves on our green credentials at Naked Sprout, and we’re also proud of how we can improve the ESG performance of the businesses we supply with our sustainable toilet rolls, kitchen rolls, and facial tissues. So it’s high time we did a little ESG explainer! What are ESG criteria, and why should they matter to businesses and investors?
What does ESG stand for?
ESG criteria are Environmental, Social, and Governance criteria; when we look at a company in terms of its ESG performance we’re interested in their stewardship of the environment, their social impact, and whether their business is set up in an ethical way.
Breaking it down by category, ESG criteria take into account:
Environmental Criteria: How well does this business perform as a steward of nature and natural resources? This includes lowering CO2e emissions, managing waste and reducing pollution, and conserving natural resources. There’s lots of overlap here with the UN’s Sustainable Development Goals (we’ll get into more detail about these in another post), which lay out the critical, wide-ranging changes that will be needed to make the global economic system more sustainable.
The “environmental” part of ESG also evaluates which environmental risks might affect the company, and how they’re managing those risks.
Our factory in Spain provides a great example of this kind of risk management - the forests around the factory are prone to forest fires, and with climate change these are likely to become more frequent. But the frequency and intensity of forest fires can be greatly reduced by regularly sweeping the forest floors of old bark, leaves, and branches. Our factory actually uses these sweepings in their furnaces, turning local forest management into a renewable source of biomass!
Social Criteria: This evaluates how a company manages relationships with employees, suppliers, customers, and the communities where it operates. Social criteria encompass issues like diversity, human rights, consumer protection, and community engagement - does the company cultivate positive social impact?
As an example, we’ll take the opportunity to highlight what we’re doing with our waste. At Naked Sprout most of our customers purchase products from us directly, and like any direct to customer business we end up with some returns, misdelivered parcels, and seconds to deal with. Instead of letting these go to waste we work with the Trussell Trust to ensure they’re donated through their network of UK foodbanks to homes around the UK. In 2023 we donated enough toilet rolls to supply 590 people for a year.
Governance Criteria: When we’re looking at governance, we’re looking at a company’s transparency, ethics, and compliance with corporate regulation. The people who lead a company must act in the best interests of their shareholders, workers, suppliers, and the wider community. Simple examples are filing financial documents on time and making sure executive pay structures are reasonable and transparent.
Our transparency as a company is core to our whole approach - because Naked Sprout is founded on a mission to make manufacturing everyday tissue products more sustainable, we are happy to open ourselves up to scrutiny. And we’re not just marking our own homework here; governance is part of the criteria used by B Labs to assess the social and ethical health of companies applying for B Corp status. Naked Sprout is a proud B Corp, and we’re currently in the process of being reassessed for our 2024 score (we are aiming to go higher!)
How an ESG focus can help businesses
So far, so good! It’s not hard to see the ways ESG criteria create a more positive footprint for a company and its operations. If a business is taking these factors seriously, it will be better for the planet, for stakeholders, and for society more widely.
And, critically, it will be better for the business as well. For a long time, the primary focus of business was profits, and while it’s still important for companies to think about profits (if they want to continue to exist!), incorporating ESG criteria into your supply chain decisions can bring a range of benefits:
Risk Management: Looking at ESG factors makes companies better at anticipating and managing risks. A business that cuts its reliance on fossil fuels by bringing renewable energy into its manufacturing, for example, will be less impacted by the global fluctuations in fossil fuel markets. Businesses who provide good jobs and a proper living wage are less prone to strikes, and well-governed suppliers are less likely to face accusations of corporate misconduct
Reputation and Brand Loyalty: As the scale of the sustainability crisis becomes more obvious, people around the world are becoming better informed and concerned about the origins of the products they purchase. As we’ve found at Naked Sprout, businesses that can show they walk the walk on green credentials are more attractive to environmentally conscious shoppers, and more likely to keep them.
Operational Efficiency: Environmentally conscious operations will often be more innovative and efficient. For instance, developing our recycled rolls using cardboard and kraft paper rather than the more normal source of office paper was a decision we made to avoid relying on a source of raw material that’s in increasingly short supply, and it also means we can collect all the material we need efficiently, in bulk, from within 85km of our factory.
Compliance and Future-Proofing: Governments around the world are tightening regulations on environmental and social issues. By selecting suppliers that already meet high ESG standards, businesses can stay ahead of the game. At the start of 2024 we made the decision to update all of our communications in line with the Green Claims Code, to offer better transparency about our products and processes. The decision was affirmed just a couple of months later, when the UK parliament voted to approve legislation that would give the Competition and Markets Authority extra powers to enforce the code, and fine companies who are found to be in breach of it.
Investor Attraction: Because of all of the above, investors are increasingly looking at ESG metrics to judge how well a company is likely to perform in the long-term. Companies that can demonstrate a robust ESG strategy are simply more attractive to investors. The response to our 2024 crowdfunding campaign is the best evidence we can provide. We were absolutely blown away by the number of investors who came on board to support Naked Sprout as we raise the bar for more sustainable tissue manufacturing.
Conclusion: growing strong
That’s what a strong ESG profile means for us as a company. Our focus on our own ESG credentials has been a massive benefit in so many ways, and we always consider ESG criteria when we’re evaluating and reviewing our suppliers.
And if you’re a business, big or small, that’s looking for a supply of soft, sustainable toilet rolls, kitchen rolls, or facial tissues, we'd love to work with you! We can tell you how much CO2e you’re saving from your scope 3 emissions by making the switch, and give counts for bleach, harsh chemicals, and plastic as well. We offer wholesale accounts so send us a message and we’ll get back to you right away.
In a world where prioritising sustainability grows more important every day, integrating ESG criteria into your supply chain is not just a good idea—it's an everyday essential. And speaking of everyday essentials… Want to try tissue products that come with great ESG credentials?
