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:
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.
What is ESG investing?
ESG investing, also known as sustainable investing, is a type of investment strategy that focuses on companies and organizations that have a positive environmental, social, and governance (ESG) profile. This means that the companies in an ESG portfolio are chosen based on their performance on a range of ESG criteria, such as their greenhouse gas emissions, energy use, waste generation, employee relations, customer relations, community engagement, and corporate governance practices.
ESG investing can take many forms, including actively managed funds that select companies based on specific ESG criteria, index funds that track broad ESG indices, and impact investing, which focuses on investing in companies or projects that are specifically designed to generate a positive social or environmental impact.
One of the main benefits of ESG investing is that it allows investors to align their investments with their values and priorities.
Many investors who are interested in ESG investing are motivated by the desire to make a positive impact on the world and to support sustainable business practices. ESG investing can also offer financial benefits, as companies with strong ESG profiles may be less risky and more resilient in the long term.
What is ESG reporting?
ESG reporting is the process of publicly disclosing information about a company’s environmental, social, and governance (ESG) performance. It is typically done through the publication of an ESG report, which may be included as part of a company’s annual report or published separately.
ESG reporting is used by a variety of stakeholders, including investors, financial analysts, rating agencies, and consumers, to assess a company’s sustainability and societal impact. These reports often include information about a company’s environmental performance, such as its greenhouse gas emissions, energy use, and waste generation, as well as its social performance, including issues such as diversity and inclusion, labor practices, and human rights. The governance component of ESG reporting includes information about a company’s leadership, management, and corporate governance practices, such as transparency, accountability, and board diversity.
It is a voluntary process, and companies are not required to disclose this information. However, an increasing number of companies are choosing to disclose their ESG performance, as there is growing demand from investors and other stakeholders for information about a company’s sustainability. ESG reporting can also help companies to identify and address sustainability-related risks and opportunities.
What is ESG Criteria?
Environmental, social, and governance (ESG) criteria are a set of standards used to evaluate the sustainability and societal impact of companies and organizations. These criteria are often used by investors, financial analysts, and rating agencies to assess the long-term performance of a company and to identify potential risks and opportunities.
a. The environmental component of ESG criteria refers to a company’s impact on the environment, including its greenhouse gas emissions, energy use, and waste generation.
b. Social component includes a company’s relationships with its employees, customers, and communities, including issues such as diversity and inclusion, labor practices, and human rights.
c. The governance component looks at a company’s leadership, management, and corporate governance practices, including issues such as transparency, accountability, and board diversity.
Companies that score well on ESG criteria are often seen as more sustainable and responsible, and may be more attractive to investors who are looking to align their investments with their values. ESG criteria are also increasingly being used by governments, consumers, and other stakeholders to evaluate the sustainability of companies and organizations.
How do businesses benefit from ESG?
There are several ways that businesses can benefit from a focus on environmental, social, and governance (ESG) issues:
- Improved financial performance: Companies with strong ESG profiles may be less risky and more resilient in the long term, as they are better positioned to manage and mitigate sustainability-related risks. This can lead to improved financial performance and higher stock prices.
- Enhanced brand reputation, brand value and customer loyalty: Companies that prioritize ESG issues are often seen as more socially responsible and sustainable, which can enhance their reputation and brand value. This can lead to increased customer loyalty and sales, as well as attracting top talent.
- Greater access to capital: Investors are increasingly looking for opportunities to align their investments with their values and priorities, including sustainability. Companies with strong ESG profiles may be more attractive to these investors and may have greater access to capital.
- Improved risk management: ESG issues can pose significant risks to businesses, such as regulatory risks, reputational risks, and physical risks from natural disasters. By addressing ESG issues, companies can better manage and mitigate these risks.
- Enhanced stakeholder relationships: Companies that prioritize ESG issues often have better relationships with their stakeholders, including employees, customers, suppliers, and local communities. This can lead to increased engagement and support from these stakeholders.
- Attracting and retaining top talent: A commitment to ESG can be a key factor in attracting and retaining top talent, as many employees are looking for companies that align with their values and prioritize sustainability.
- Access to new market opportunities: Companies that are seen as leaders in sustainability may have access to new market opportunities, such as partnerships with governments and other organizations that are focused on sustainability.
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.