ESG is an industry recognized framework that helps stakeholders understand how a company handles environmental, social, regulatory risks and opportunities (sometimes referred to as ESG factors).
ESG is an acronym for Environmental, Social, and Governance. ESG takes the macro perspective on the credence that sustainability extends beyond just environmental concerns and ventures into playing a pivotal role in building trust with various participants of the investing community.
While the term ESG is often used in the context of investing, stakeholders include not just the investment community but also customers, suppliers, and employees, all of whom are increasingly interested in how sustainable an organization’s operations are. Hence, trickling down its significance to the entirety of the global financial system.
Environmental factors refer to an organization’s environmental impact(s) and risk management practices. This is inclusive of various direct and indirect greenhouse gas emissions, management’s stewardship over natural resources, and the firm’s overall adaptability towards physical climate risks (like climate change, flooding, and fires). Add to that, its ability to function across disrupted supply chains in this war-struck era.
The social pillar refers to an organization’s relationships with its assortment of stakeholders. Examples of factors that a firm may be measured against include Human Capital Management (HCM) metrics (like fair wages and employee engagement) but also takes account of the organization’s impact on the community in which it operates.
ESG impacts have extended beyond the company’s walls and to its supply chain partners, particularly developing markets where environmental and labor norms may be less stringent. This ensures the well-being of social aspects concealed within the economic system.
Corporate governance explains how an organization is led and managed. ESG analysts will seek to understand better how leadership’s incentives are aligned with stakeholder expectations, how shareholder rights are viewed and honored, and what types of internal controls are placed to promote transparency and accountability on the part of leadership. It critically examines the professional skepticism and judgment of the management in the decisions.
Things to look forward – 2023:
Around the globe, there is rising awareness of the risks and impacts of climate change and a growing urgency to adapt. Companies across sectors are setting goals to reach net-zero emissions by 2050.
While many large companies are setting sustainability goals and publishing ESG-related data, investors, regulators, and the greater public are exercising heightened scrutiny of corporate sustainability efforts, calling out what they perceive as “Greenwashing”, which is founded on the concern that companies may be using disclosures and sustainability-related labels on products and services as a marketing tool to appear more proactive on those issues than they truly are.