ESG is an acronym for Environmental, Social and Governance. ESG is a framework for mindful consumption. It aids companies in luring investors, fostering consumer loyalty, enhancing financial performance, and ensuring the sustainability of business operations.
Like any other business, your business is deeply connected with environmental, social and governance concerns and it makes sense therefore to build a strong ESG framework to build more value.
The Individual elements of ESG:
1. E in ESG stands for the Environment which includes the energy that your company makes use of and the waste it produces. The resources that are required and the consequences on the planet for the same or for humans. E is about carbon emissions and climate change and because each company has to use the energy and resources so every company affects the environment and is also affected by the environment.
2. S in ESG stands for Social which is the social criteria and addresses the relationships the company has and the reputation it fosters with communities, institutions and people where you are carrying your business operations. S also includes diversity and inclusion and every company operates with a broader and diverse society.
3. G stands for Governance which means the internal system and practices, controls and procedures your company is adopting to govern itself. IS the company making effective decisions, complying with the law and meeting the requirements of external stakeholders. Every company needs governance because it is a legal creation.
As a mechanism for investors to match their portfolios with their principles, sustainable investing was once thought of as a specialized area of the investment world. Today, however, it is a fact that ESG problems, investment performance, and business performance are all closely related.
ESG’s component parts are interconnected, just as it is an integral aspect of how you conduct business. When businesses try to abide by environmental rules and more general sustainability concerns, for instance, social criteria might overlap with environmental criteria and governance.
Why is ESG important?
It raises awareness of the various climate challenges that are present and motivates companies to implement environmentally friendly practices and regulations. The social component of ESG takes into account the health and safety of both shareholders and employees on an equal level.
The movement aims to ensure that companies take into account their influence on society and the larger world besides their profit margin. Businesses have only recently begun to use the technique, even though the concept behind it has been around for a while—long before we started calling it “ESG.”
The unanticipated risks of a pandemic and the climate catastrophe, both of which are having an enormous influence on the world economy, are frequently compared. As a result, policymakers and investors now recognize the importance of speeding investments and company progress toward prioritizing ESG. After all, in order to address needs like those mentioned above as well as others like job creation, equitable growth, resource protection, and customer interest protection, our society is dependent on highly effective enterprises as well.
In the US, ESG-focused funds have experienced an increase of nearly tenfold from USD 5.4 billion in 2019 to USD 51.1 billion, more than twice from USD 21.4 billion. Managed sustainable fund assets in Asia, excluding Japan, nearly tripled to USD 36.7 billion in March 2021 from a year earlier.
The epidemic has also created corporate governance, an extremely complex process that necessitates making crucial decisions about business strategies, employee wellbeing, risk mitigation, and stakeholder management in an undiscovered environment.
Other important things that need our attention for which ESG is crucial:
There were a large number of natural disasters in 2020. Extreme flooding in China, India, and Pakistan; record-sized wildfires in Australia, the US, Romania, Portugal, Spain, and Italy; windstorms and hurricanes in the UK; landslides in Germany; volcanic eruptions in the Philippines; severe weather events throughout Asia; and a hurricane season that broke records that affected everyone who lives on the Atlantic.
There was a heat dome over western Canada, and at least 23 different countries recorded high temperatures of at least 50 C (122 F). Antarctica had record-breaking high temperatures as well. It is clear from Haiti’s devastation caused by a tropical storm, earthquake, and political unrest how inadequately equipped we are to handle several disasters.
Over $140 billion is expected to be spent as a result of the top 10 weather occurrences. The cost of the other weather-related incidents is anticipated to be over $2Tr. The estimated 8,200 deaths lost in the storms are not included in that.
Methane levels have increased by the most annually on record, according to researchers, and this is connected to 25% of the world’s warming. The highest peak in sea level history has also been reached.
This has only helped to demonstrate how ill-equipped we are to deal with the changes that our unsustainable lifestyles will inevitably bring about for our planet. ESG can help in this situation because it is what links us to every activity we take throughout our lives. If you want to create a sustainable world, focusing on these facts is very important and hence ESG is the way.
Fundamentals behind ESG Investment:
We must discover precisely what the ESG score is based on in order to comprehend how the scores are generated. One of the three ESG factors is made up of many other components, each of which is part of ESG investment.
ESG Factors:
Because there are so many issues with climate change, the environmental part of ESG has received the greatest attention. Some businesses are accused of ignoring the ESG component and concentrating just on the E, according to Binachi Public Relations. Therefore, in order to receive a high score for the environmental factor, a corporation must:
- Use green energy sources.
- Reduce carbon emissions and their carbon footprint
- Utilize eco-friendly materials.
- Put in place an appropriate climate change policy.
- Be mindful of how you use and conserve water.
- Employees should receive rewards for adopting climate-friendly transportation methods
- Interaction with environmental regulating organizations is excellent
The stakeholders in a firm, such as employees, shareholders, and suppliers, are included in the social element because it deals with all kinds of concerns involving people. A business must take the following actions to receive a high social impact rating:
- Give your staff fair treatment and adequate compensation.
- Low employee turnover
- Pay special attention to employee development
- Maintain safety procedures at appropriate work locations,
- Source supplies responsibly and defend consumer rights
- Offer excellent client service
- Have an organization’s mission
- Have a workforce that is inclusive and diverse.
The governance aspect focuses on issues with how a company is run, including how effective senior management is, how independent the board members are, and how ethically the company is operating. The following actions must be taken by a corporation in order to score well in the governance category:
- Maintain open lines of communication with the shareholders
- Give the board members terms that are adequate in length
- Adopt moral principles
- Prevent any possible conflicts of interest
- Give shareholders the power to select the board of directors
- has a successful track record in court cases;
- separating the CEO and chairman responsibilities;
- separating the CEO and chairman responsibilities; majority
- Check to see if any executive compensation is linked to future value
It’s significant to remember that there are various ESG rating organizations. There are various companies that offer ESG ratings, and they all gather data in different ways. This results in a wide range of ESG score calculation methods.
Why Should Companies Invest in ESG?
The ESG practice first emerged in the 1960s, and ESG investing developed from SRI, or socially responsible investing, which barred stocks or entire industries from investments connected to business operations, such as products from conflict zones, tobacco, and firearms. In 2005, the first research, “Who cares Wins,” which was created in collaboration with the biggest institutional investors and banks in the world, was released. The term ESG was originally used in 2004 by former UN Secretary-General Kofi Annan.
Due to the increasing number of investors trying to include ESG aspects in the investment process, ESG is now expanding and evolving quickly. The ESG market is actually expected to grow by a factor of two this year. In addition, the Portfolio Decarbonization Coalition, a United Nations-sponsored group of 27 institutional investors and asset managers with a focus on Europe and in control of $3.2 trillion in assets, has pledged $600 billion to finance green initiatives and projects.
In the banking sector and everywhere else, ESG factors are being implemented firmly thanks to European regulations, if we look at the legal side of things. The ESG framework is promoted inside the EU as a tool to assist green agreements and make sure a sustainable economy is put in place. The figures show a growing understanding that organizations must find new ways to manage their environmental effect if they want to succeed. The development of advanced methodologies for assessing ESG actions and effects is the key to realizing sustainability, which is the new ideal.
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How can companies go about ESG investing?
One size does not fit all when it comes to ESG investing. Under the banner of ESG investment, researchers have identified three common investor goals or motivations: integration, values, and impact.
To achieve these goals, investors can take a variety of approaches, including ESG integration, exclusionary or negative screening, and thematic investing, to name a few. Though ESG investment comes in two forms, ESG funds or ESG stocks, you can plan to invest in various ways.
ESG investing is a subset of a larger category of investments based on monetary and social gains. On one end of the scale, purely financial investments are made in an effort to maximize shareholder and debt holder value through financial returns based on absolute or risk-adjusted metrics of financial value.
At best, it is based on the assumption that capital markets would efficiently allocate resources to those areas of the economy that will maximize benefits and advance the economy as a whole. On the other end of the spectrum, pure social “investing,” like philanthropy, seeks only social returns. The investor benefits from confirming evidence of benefits to parts of or the entire society, particularly those related to environmental or social benefits, including those pertaining to worker and human rights and gender equality.
Within this range, ESG investing concentrates on increasing financial returns and makes use of ESG aspects to evaluate risks and opportunities, particularly over the medium to long term. The fact that it considers elements besides the evaluation of short-term financial performance and commercial threats to that performance sets it apart from merely commercial investing.
While some investors use ESG as a risk management tool, others utilize it to strengthen their stance on sustainable finance so that it is in line with social and impact concerns.
Top 10 ESG driven companies for 2022:
According to Just Capital following Companies are making their mark in following ESG practices:
- Alphabet
- Intel
- Microsoft
- Bank Of America
- Salesforce
- Apple
- PayPal
- Verizon
- NVIDIA
- Cisco
Why Should ESG be a part of your business?
ESG is significant to business for several reasons. Well first of all, according to a statement made by the Financial Times, “ESG is a significant determinant in firm performance and is the best measure of environmental, social, and governance effectiveness.” Therefore, companies that pay attention to ESG can perform better than those that do not. It can do the following:
- It could enhance a business’s reputation and image, luring more investors in the process.
- By introducing new rules from governments around the world, it has the potential to impact the triple bottom line.
- Due to the pressure on businesses to innovate, several new opportunities are created.
- It benefits the environment, your kids, and your grandkids as a result.
Sustainability is just excellent business practice, particularly given the exponential growth of the field. Either your business is a leader and a crucial component of the open solution, or your business is a problem that seeks to conceal your true nature behind fake statistics. One of these options is eco-friendly.
More and more companies are learning about the many facets and all-permeable benefits of ESG, including how to attract talent, target future consumers, enhance brands, and innovate. ESG generally gives the company the tools it needs to be resilient in both the present and potential future situations. To see why ESG is more significant than ever, let’s examine its main advantages in greater detail:
1. It adds to the top line growth:
Businesses can extend their operations in existing markets and enter new ones using ESG initiatives and practices, provided their ESG strategy is sound. The government can make access easier by granting these businesses licenses and permissions.
According to GreenPrint’s Business of Sustainability Index[5] report, which was published in March 2021, 75% of Millennials in the US are willing to pay more for a product that is environmentally friendly, and 77% of the sample size as a whole is worried about the environmental impact of the products they purchase.
2. Reduce costs:
Production practices that are more environmentally friendly tend to increase productivity and cut costs for businesses. Nestlé is one such instance, having declared that it will invest up to USD 2.1 billion by 2025 to switch from virgin plastic packaging to food-grade recycled plastics and the creation of additional sustainable packaging alternatives.
It would not only assist it in reducing its carbon footprint but also protect it from non-compliance charges in the different operational regions in which there are stricter regulations on the use of plastic packaging.
3. Handling of stakeholders’ and regulatory compliances effectively
According to the markets they serve, all firms are impacted by one or more types of regulations. Businesses with robust ESG measures, especially in governance, are subject to less regulatory oversight and have greater operational independence. The pressure from environmental activists, labor unions, etc. is also less on them. Additionally, consumers favor these brands.
For instance, in 2017 Starbucks launched the “Starbucks China Parent Care Program,” which offered health insurance to more than 10,000 parents of Starbucks workers in China. In light of Starbucks’ plans to grow in China and the intensifying trade conflict between the United States and China, it was viewed as a wise strategic choice.
4. Get the right talent and increase employee output
Good organizations with high ESG scores are considered to draw stronger personnel and have higher retention rates. Employees get an internal sense of pride when there is a defined sustainability strategy.
The younger generation favors working for businesses that have more pronounced social obligations. Millennials evaluate a company’s social and environmental obligations when determining where to work, according to a Cone Communications report on Millennial Employee Engagement in 2016. 64% of Millennials do so.
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Creating an ESG Policy Framework:
Companies should avoid trying to please everyone when creating an ESG policy framework. Choose three to five quantifiable ESG criteria instead that are relevant to your businesses and constituencies and are in line with your corporate strategy.
For instance, a drilling oil and gas company needs to assess the effects on finite natural resources and the management of water and waste. Social training on anti-harassment and racial sensitivity will boost the corporate brand and make customers feel welcome if your business is service-focused like Starbucks.
As a company that provides high-end services to customers, Wynn Resorts places a strong emphasis on employment programs to guarantee they can draw in and keep the best talent.
These initiatives include workplace safety and sensitivity, gender equality, a Women’s Leadership Forum, and other activities.
Investigating sector rankings within a significant sustainability ranking index is a useful tool to compare your company’s ESG framework to those of your competitors.
Focus on next stages:
The next stages are to set measurements, measure them regularly, and disclose progress publicly when your organization has chosen the proper criteria for its ESG framework; otherwise, you risk being accused of “greenwashing.” Companies that engage in “greenwashing” provide a public relations narrative emphasizing high standards for human rights and environmental protection but fail to act on these promises.
As the SEC increases its demands that businesses provide CSR and sustainability reports, it will be more difficult to get away with greenwashing.
Investors use a variety of metrics to identify whether a company is faking its ESG principles or actually implementing them into its business activities. Companies that are sincere about carrying out their ESG policies give the CEO and general counsel precedence in this area and link compensation to ESG measures.
Conclusion: So, ESG practices are very important to adopt to make this world more sustainable and it raises awareness of the various climate challenges that are present and motivates companies to implement environmentally friendly practices and regulations. Employees and stockholders are treated equally for the social component of ESG, and their health and safety are taken into account. So, implementing ESG practices is crucial for the benefit of everyone in totality.
