ESG stands for Environmental, Social, and Governance. These are the three central factors in measuring the sustainability and ethical impact of an investment in a company. This concept is gaining significant traction, as it provides a comprehensive way to evaluate the long-term viability and ethical considerations of companies' operations.
What is ESG?
ESG represents a company’s stance and actions on environmental impact, social responsibility, and governance practices. It is a framework for assessing how a company's operations align with sustainable development and societal goals. In a world increasingly conscious of the impacts of corporate actions, ESG provides a critical measure of a company's commitment to operating responsibly.
Why is ESG important?
ESG criteria are crucial for stakeholders, including investors, who use them to evaluate organisations on how well they are managing risks and opportunities related to the environment, society, and internal management. Good ESG credentials can improve a company’s reputation, attract and retain talent, influence investment decisions, and foster customer and employee loyalty.
What are the 3 pillars of ESG?
- Environmental: This pillar is related to an organisation’s impact on the earth, encompassing waste management, resource conservation, and climate change mitigation
- Social: The social pillar involves the company's relationships with employees, suppliers, customers, and communities, including labour practices and human rights
- Governance: This area relates to the company's leadership, audits, internal controls, and shareholder rights
What falls under the Environmental pillar?
The environmental pillar of ESG focuses on how an organisation interacts with the physical environment. This includes assessing emissions such as greenhouse gases and the organisation’s operations impact on air, water and ground quality. Companies are increasingly scrutinised for their resource usage, with a focus on sustainable practices like using recycled materials and minimising waste.
Additionally, stewardship of water resources and land use, including deforestation and biodiversity, are key areas of concern. Organisations also report on positive sustainability impacts they might have, which may translate into long-term business advantages.
Organisations that fail to implement environmental policies and safeguards can suffer massive financial repercussions and destroy corporate reputations that took time to build.
What falls under the Social pillar?
Organisations report on how they manage their employee development and labour practices. They report on product liabilities regarding the safety and quality of their product. They also report on their supply chain labour, health and safety standards and any controversial sourcing issues. Where relevant, how a company addresses social issues, such as inclusivity and access to its products for underprivileged groups, is increasingly seen as a measure of its social responsibility.
What falls under the Governance pillar?
The main issues reported under the governance pillar are:
- Shareholders rights
- Board diversity
- Executive remuneration and how it aligns with company’s sustainability performance, and
- Matters of corporate behaviour such as anti-competitive practices and corruption
Most organisations are already familiar with this reporting.
How does ESG create value?
By focusing on ESG factors, organisations can attract better talent and more customers, increase productivity, increase operational efficiency and improve risk management. Waste reduction, reducing water consumption and energy efficiency can also save operating costs.
Investors and customers increasingly prefer organisations with a focus on ESG, which can lead to competitive advantages and higher valuations.
What is the difference between ESG, CSR and sustainability?
While ESG, Corporate Social Responsibility (CSR), and sustainability are related concepts, they differ in scope and focus. CSR refers to a company's broader social responsibilities and its efforts to positively impact society. On the other hand, ESG provides a more specific framework for measuring an organisation's impact in sustainability, social, and governance aspects.
Sustainability generally refers to practices that ensure long-term environmental health. On the other hand, ESG encompasses a broader range of criteria, including social and governance factors, which can be quantitatively measured and reported.
Who needs to report on ESG?
All companies within the scope of the Corporate Sustainability Reporting Directive (CSRD) will need to report on ESG performance. The CSRD is a proposed legislative measure by the European Commission to improve the quality, comparability, and relevance of sustainability reporting by companies in the EU.
What ESG reporting is required?
ESG reporting is the disclosure of data on an organisation’s Environmental, Social, and Governance performance. These reports help investors and other stakeholders understand the management of ESG risks and opportunities. Standardised reporting methods like the Global Reporting Initiative summarise this information for better transparency. It is essential for organisations to integrate ESG factors into their decision-making processes and for investors to consider them in their investment criteria.
We have a dedicated ESG Hub that explains how we can help businesses to achieve their ESG goals.
The content of this article is provided for information purposes only and does not constitute legal or other advice.