ESG: Environmental, Social, Governance
Everything you need to know about corporate ESG criteria in one place.
What is ESG criteria?
ESG stands for Environmental, Social, and Governance. ESG is a set of metrics that can evaluate a company’s compliance and performance with regards to environmental and social factors, and that company’s ability to generate positive, measurable impact.
Traditionally, investors would rely on financial data to determine the suitability of a company for investment. Today however, ESG metrics are also being used to assess the responsible values of an organisation, its long-term prospects, and investment viability.
These criteria relate to sustainability, community, and the responsible administration of the organisation.
While ESG concerns have been around for decades, COVID has put the spotlight firmly on ESG in the last two years, bringing inequality to the forefront alongside a growing global consciousness
ESG vs sustainability
ESG and sustainability are related concepts, but they differ in their focus and scope. ESG, which stands for Environmental, Social, and Governance, refers to the criteria that investors use to evaluate companies' ethical and sustainability practices. ESG takes into account a company's environmental impact, social responsibility, and corporate governance practices.
Sustainability, on the other hand, refers to the ability to meet the needs of the present without compromising the ability of future generations to meet their own needs. Sustainability encompasses a broader range of issues, including environmental, social, and economic factors. While ESG focuses on the practices of companies, sustainability looks at the impact of these practices on the planet and society as a whole.
ESG vs CSR
CSR stands for Corporate Social Responsibility. The main difference with ESG is that CSR, which began to appear in the early 2000s, is more of a general philanthropic program of initiatives by a company in response to whatever social issues it has chosen. ESG, on the other hand, benchmarks against specific and independent metrics.
Breaking down ESG metrics
E
E is for Environmental
The ‘E’ in ESG stands for ‘environmental’ considerations. These environmental factors concern the preservation of our natural world and companies’ contribution to the cause.
Examples:
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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
S
S is for Social
The ‘S’ in ESG stands for ‘social’ considerations. These social factors concern how a company manages its relationships with its staff, the communities around it, and the overarching political environment.
Examples:
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Diversity, Equity, and Inclusion (DEI)
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Labour rights and fair employment practices
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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
G
G is for Governance
The ‘G’ in ESG stands for ‘governance’ considerations. Governance ESG criteria cover corporate policies, stakeholder rights and responsibilities, as well as how the corporation is managed and its success measured.
Examples:
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Board composition and independence
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Executive compensation and incentives
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Ethics and corporate culture
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Anti-corruption and anti-bribery measures
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Data privacy and cybersecurity
History of ESG & the movement toward green investing
1960s-1970s
1980s
1999
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.
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.
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.
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
2021
2023
The Paris Agreement is signed, highlighting the urgency of addressing climate change.
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.
The Sustainable Development Goals (SDGs) are introduced by the United Nations. They provide a framework for addressing global social and environmental challenges.
The European Union introduces the Sustainable Finance Disclosure Regulation (SFDR). This mandates financial institutions and companies to disclose their ESG practices and impacts.
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
Below are just a few reasons why ESG is so crucial for companies today.
1. 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.
Stakeholders, including investors, employees, customers, and communities, are increasingly demanding that corporations operate in a sustainable and responsible manner.
2. Stakeholder expectations
3. 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
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.
4. Access to capital
5. 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
ESG and the board of directors
The relationship between ESG and the board of directors ensures effective oversight, accountability, and integration of ESG considerations into corporate strategy. Here are some key aspects of their relationship.
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
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.
Risk management
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.
Reporting and disclosure
Boards are responsible for ensuring accurate and transparent reporting of ESG information to stakeholders. They oversee the development and implementation of robust reporting frameworks.
Accountability and metrics
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
Board composition and expertise
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.