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ESG investing is quite the buzzword in 2021, as it’s finally taking the leap from a fringe, specialty-type investment to a force that can actually change how a business operates. ESG stands for environmental, social and governance, and it refers to how a company affects the environment, its workers and the world as a whole. Whereas shareholders used to be concerned nearly exclusively with a company’s financial returns, a rising tide of investors will only buy shares of businesses that also operate as responsible corporate citizens. But are companies really changing their business plans simply due to the influence of ESG investors? The answer is unequivocally yes. Here are ways that business is changing forever thanks to the ESG movement.

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Corporate Reporting

Public companies are required by law to publish their financial results, but more and more are voluntarily providing information on their ESG performance as well. A number of frameworks have sprung up to help direct companies as to what they should be reporting, such as the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB). These and other frameworks aim to make reporting of both financial and non-financial risks consistent across companies.

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Composition of Board Members

One of the most visible responses to the ESG movement is the changing composition of corporate boards. About a decade ago, around 14% of board members of S&P 500 companies were women, but that has roughly doubled today to about 28%. Every company in the S&P 500 now has at least one woman on its board. Along with all that, Starbucks has made a public pledge to have at least 30% of corporate roles filled by minorities by 2025.

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Data Management

ESG data management is big business. The rise of ESG investing has created a whole new layer of transparency that companies are now expected to implement, and this has resulted in a huge increase in the need for data collection and management. As ESG requirements are only expected to grow, businesses will have to implement more advanced technology and data management tools to keep up with ESG reporting.

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Disclosure Requirements

State and national governments, along with various regulatory boards, are beginning to implement new ESG-related standards that companies will likely have to comply with in the near future. The Nasdaq composite, for example, is considering implementing a policy requiring companies to disclose their board diversity composition before listing any new company. The state of California has passed a law requiring companies to diversify their boards within the next two years. On a national level, the U.S. government is focusing its policy on achieving net-zero emissions in all sectors of the economy by 2050, something that would require corporate compliance. Various resolutions in the United Kingdom and European Union are also being proposed to tighten environmental and human rights regulations for companies.

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Investment Manager Actions

All of this heightened awareness of corporate ESG behavior has changed the way that professional money managers do business. Now, ESG screens are commonplace when managers are choosing investments. There is also some evidence that companies with strong ESG controls in place outperform their peers, making an ESG review an essential part of investment strategy.

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Last updated: July 22, 2021

This article originally appeared on Could ESG Investing Change the Business World?