A short guide to understanding ESG (Environmental, Social and Governance)

13 October, 2021

Sustainability is an overarching clause that encompasses everything from ecological balance to social-political equality. This week, I want to cover an important aspect of sustainability that is easy to overlook by businesses in their development—adhering ESGs to gain financial security as well as build just, peaceful and strong institutions. 

 

ESG, short for Environmental, Social and Governance are a set of 3 key factors used for measuring sustainability and ethical impact of an investment in a business or company, as well as helps to determine their future financial performance. Not only do they add value to your business by providing authenticity through transparency, but they also open you to the investors’ eyes.

 

Before I dig deeper into ESG, here is a quick glossary to familiarise yourself with industry terminology:

Glossary 

 

CSR: Corporate Social Responsibility is a set of self-governed regulations split into four categories, namely environmental responsibility, ethical responsibility, philanthropic responsibility and economic responsibility.

 

ESG investing: As the name suggests, ESG investing refers to the set of actions an organisation takes to get a rating on the ESG scale by a third-party institute. These include looking after the company’s carbon footprint and checking sustainability efforts that make up its supply chain, its abilities to drive change through governance, financial reports and social responsibility towards communities (stakeholders and consumers to employees).

Do note that the terms Sustainability Report, CSR Report, Impact Reporting, etc are often used interchangeably and have roughly the same principles with slightly different approaches.

 

Stewardship: “The responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.” as defined by Financial Reporting Council.

 

Divestment: The act of dissociating or selling assets and securities due to behaviour not aligned with ESG values, or as a way to display a strong commitment to ESG and responsible investing practices.

 

Greenwashing: A marketing tactic used by organisations to appear more sustainable and environmentally friendly than they are.

 

Carbon offset: Notable reduction in greenhouse gasses to compensate for their production elsewhere refers to carbon offset.

 

Carbon sequestration: It refers to curbing the existing CO2 in the atmosphere by storing it for s long term or optimising it  to minimise ecological damage

 

Scope I, II, III emissions: In order off the listing, these refer to the greenhouse gas emissions that your company is directly responsible for like on-site burning of fossil fuels, emissions from sources that your company regulates, like electricity, heat, or steam purchased from a utility provider, and emissions from sources that are related to your operations, such as employee commuting or wastewater disposal.

 

Triple Bottom Line: social, environmental, and financial make the accounting framework.  Companies incorporating this framework believe that there are three components to look after—people, planet, profit.

 

Natural Capital: Any stock or flow of energy and material that produces goods and services, including renewable and non-renewable resources, sinks that absorb, neutralise or recycle wastes and processes such as climate regulation. It is the basis of the production of life itself.

 

Human Capital: People’s health, knowledge, skills, motivation—all aspects that form the human base for a flourishing economy.

 

Social Capital: It concerns the institutions that help us maintain and develop human capital in partnership with others e.g. families, communities, businesses, trade unions, schools, and voluntary organisations.

 

Manufactured Capital: material goods or fixed assets that contribute to the production process rather than being the output itself – e.g. tools, machines and buildings.

 

Financial Capital: It plays an important role in our economy, but unlike the other types, it has no real value itself but is representative of natural, human, social or manufactured capital e.g. shares, bonds or banknotes.

 

Are CSRs and ESGs different?

The idea behind Environmental, Social and Governance standards comes from the genesis of Corporate Social Responsibility, which essentially refers to the adoption of practices and policies by institutions for the betterment of society and the environment. For most cases, these actions are self-monitored by companies, thus not providing complete accountability. 

 

ESGs on the other hand refer to third party monitoring of quantifiable actions such as managing carbon footprint or risk management systems and declaring social and financial reports to regulate how well a company runs. Numerous institutions and international frameworks are set in place to implement, regulate and monitor ESGs such as:

GRI Sustainability Reporting Guidelines

United Nations Global Compact

Sustainable Development Goals

ISO26000 – Corporate Social Responsibility

Why should you care about ESG reporting?

Over the last decade, it has become clear that everyone from consumers to investors looks for companies adhering to these standards before indulging in business with them. 

 

Many big companies from fast fashion brands to big manufacturers came under fire for not adhering to ESG standards recently. One particularly made news this year—Nestle. The long list of violations from unethical work environment, child labour, mislabeling was enough to push the brand towards the “most hated brand” title. 

 

ESGs are now a standard measure of certain investments a company makes, their behaviour and future financial performance. These include Energy efficiency, GHG emissions, staff turnover and their training and qualification, maturity of the workforce, absenteeism rate, litigation risks, corruption, revenues from new products, etc. Having a transparent ESG report allows stakeholders to see risk management, longevity and sustainability of your plans before they invest, it also builds a better picture of the company in terms if social rapport and invites a loyal customer base. Gen Z and millennials top the list currently, being the most aware customers.

 

How to align with SDGs through ESG systems?

Seek leadership from environment and sustainability professionals who create a positive culture around your vision. Enable them to catalyse your progress on resource management by developing an action plan identifying departmental and individual responsibilities through a set of indicators. A strong action plan for implementation of these internal with good communication will enable internal and external stakeholders to be aware of and buy into.

 

Involve your workforce in resource management initiatives, particularly those in research and development and the design of products and services. Align your systems to deliver effective performance improvements in the management of resources and make enhancements regularly.

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