What is ESG?
ESG stands for Environmental, Social, and Governance. It is a framework by which investors assess an organisation’s responsibility and impact on the world around them.
Companies today have a responsibility to limit their negative impact. Investors are increasingly attracted to businesses actively involved in reversing sustainability damage.
A three step Foundational ESG Framework
1
Environmental sustainability factors
The E stands for ‘environmental’. The following are the most critical factors to be considered:
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Climate change and carbon footprint
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Resource management
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Biodiversity and ecosystem conservation
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Pollution prevention and waste management
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Innovation and technology
2
Social factors
The S stands for ‘social’ considerations. The following are examples:
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Diversity, Equity, and Inclusion (DEI)
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Labour rights and fair employment practices
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Employee wellbeing and work-life balance
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Consumer protection and product safety
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Community engagement and impact
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Philanthropy and social impact initiatives
3
Governance factors
The G stands for ‘governance’. The following are examples of important governance factors for organisations to consider:
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Board composition and independence
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Executive compensation and incentives
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Shareholder rights and engagement
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Ethics and corporate culture
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Anti-corruption and anti-bribery measures
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Stakeholder engagement and accountability
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Data privacy and cybersecurity
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Transparency and disclosure
ESG
While ESG offers a broad evaluation of a company's sustainability practices, CSR covers specific voluntary initiatives undertaken by a company.
ESG is a comprehensive framework that assesses a company's sustainability performance across environmental, social, and governance factors. Investors use it to evaluate long-term value creation.
CSR
CSR, on the other hand, refers to a company's voluntary initiatives to address social and environmental issues beyond any legal requirements. It focuses on specific actions and activities undertaken by a company to contribute positively to society.
History of ESG & the movement towards green investing
History Timeline
1960s-1970s:
The concept of corporate social responsibility (CSR) emerges, emphasising the ethical and social responsibilities of businesses beyond profit-making. Activists start raising concerns about social issues, such as civil rights, labour rights, and environmental pollution.
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The concept of socially responsible investing (SRI) emerges during this time, highlighting the ethical and social responsibilities of businesses.
In 1971, The Pax World Fund becomes one of the first mutual funds in the United States to exclude investments in weapons and tobacco companies.
1980s
The term "socially responsible investing" gains popularity, and SRI funds begin to emerge in various countries. The focus expands beyond negative screening to include positive selection criteria.
1999
The United Nations Global Compact is launched. It encourages businesses to adopt sustainable and socially responsible policies and practices.
2000
The term "ESG" begins to gain traction. It provides a broader framework for incorporating environmental, social, and governance factors into corporate sustainability and sustainable investing.
2006
The United Nations Global Compact launches its Principles for Responsible Investment (PRI). These guidelines encourage investors to consider ESG factors in their decision-making processes.
2010s
The launch of the Sustainability Accounting Standards Board (SASB) in the United States brings standardised ESG reporting and disclosure guidelines.
Sustainable investing gains significant momentum, driven by increased awareness of climate change and sustainability issues. The number of ESG-focused investment products grows.
2015
The Paris Agreement is signed, highlighting the urgency of addressing climate change.
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The Task Force on Climate-related Financial Disclosures (TCFD) is established to develop consistent climate-related financial disclosures. It urges companies to disclose their climate-related risks and opportunities.
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The Sustainable Development Goals (SDGs) are introduced by the United Nations. They provide a framework for addressing global social and environmental challenges.
2021
The European Union introduces the Sustainable Finance Disclosure Regulation (SFDR). This mandates financial institutions and companies to disclose their ESG practices and impacts.
2023
90% of the global economy is now part of a net-zero pledge. Governments are mandating ESG reporting and action from companies.
Importance of ESG for Corporates
ESG is increasingly important for corporations due to several reasons.
Read on to learn more.
Risk management
By considering ESG factors, corporations can identify and mitigate potential risks associated with environmental and social issues. This proactive approach helps protect the company's reputation, avoid regulatory penalties, and prevent costly disruptions to operations.
Stakeholder Expectations
Stakeholders, including investors, employees, customers, and communities, are increasingly demanding that corporations operate in a sustainable and responsible manner.
Long-term value creation
ESG factors have a direct impact on a company's long-term financial performance and value creation potential. By addressing environmental and social concerns, corporations can:
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Improve operational efficiency
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Reduce costs
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Attract and retain talent
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Access new markets and investment opportunities
Access to capital
Investors are placing greater emphasis on ESG considerations when making investment decisions. Companies that demonstrate strong performance in this area are more likely to attract capital and secure favourable financing terms. Integration of ESG practices can enhance a company's access to sustainable funding sources.
Regulatory Environment
Governments and regulatory bodies are increasingly implementing stricter regulations and disclosure requirements related to ESG issues. Corporations that proactively address them are better positioned to:
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Adapt to evolving regulations
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Minimise compliance risks
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Seize potential competitive advantages
Governance and oversight
The board of directors holds the primary responsibility for governance and oversight of the company, including ESG matters. They establish policies, set goals, and ensure the company's compliance with relevant regulations and standards.
Strategic alignment
Risk management
Reporting and disclosure
Accountability and metrics
Board composition and expertise
The board plays a pivotal role in aligning ESG considerations with the company's strategic objectives. They integrate these factors into the overall business strategy, identifying opportunities and risks related to sustainability and societal impact.
ESG risks, such as climate change, reputational issues, and regulatory compliance, can have a major effect on a company's long-term viability. The board oversees the identification, assessment, and management of these risks to protect shareholder value and ensure sustainable operations.
Boards are responsible for ensuring accurate and transparent reporting of ESG information to stakeholders. They oversee the development and implementation of robust reporting frameworks.
The board establishes accountability mechanisms to monitor and assess the company's ESG performance:
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Defining key metrics
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Setting targets
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Regularly reviewing progress
Boards may consider including members with diverse backgrounds and expertise in sustainability-related areas. This allows for better ESG oversight, informed decision-making, and enhanced board effectiveness.
60-second takeaways
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Environmental, Social, Governance (ESG) is a framework by which investors assess an organisation’s impact on the world.
90% of the global economy is part of a net-zero pledge and governments are mandating ESG reporting from companies.
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ESG covers things like an organisation’s carbon footprint, workforce diversity and wellbeing, data security, corporate ethics, and transparency.
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ESG presents an opportunity for companies to future-proof, add value for stakeholders, and better manage risk.
ESG has evolved out of the concepts of corporate social responsibility and socially responsible investing.
The board of directors plays a critical role in the deployment of a organisation’s ESG strategy.