What is ESG and why is it trending ? Part 1

I have worked in the sustainability ecosystem for some years and decided to lend my voice for ESG advocacy as time permits.

 What is ESG and why is it trending?

ESG is an acronym and the terminology for sustainable and responsible finance components. It is basically a framework considering environmental, social and governance factors alongside financial factors in the investment decision-making process.

 The term ESG was first coined in 2005 in a landmark study entitled “Who Cares Wins.” In less than 20 years, the ESG movement has grown from a corporate social responsibility initiative launched by the United Nations into a global phenomenon representing more than US$30 trillion in assets under management. In addition, the terms “ESG” and “Sustainability” are used interchangeably, especially when it comes to benchmarking and disclosing data. Sustainability is an umbrella term for many green concepts and corporate responsibility, while ESG has become the preferred term for investors and the capital markets.

ESG Basic Composition

Environmental. This relates to a Organization’s impact on the environment. Criteria generally include a company’s energy usage, pollution and waste, and use of natural resources. A company’s environmental improvement initiatives are also considered as a positive metric (useful examples are the use of electric cars, using renewable energy, proper waste management etc.) Simply put, is conservation of the natural world; Climate change, Bio diversity, Carbon emissions, Air, water and waste management etc as major concerns.  

Social. This correlates to the Organization’s impact on society and stakeholders. Factors considered here include the safety of products, its treatment of employees, charitable initiatives, supplier relationships, impact on local communities, and employee diversity. This is a keen consideration of people & relationships. - Customer satisfaction, Consumer rights, Data protection and privacy etc

Governance. This is the leadership framework standards for running an Organization. It attempts to explain the risks in a firm’s governance structure. Some popular metrics include board diversity, accounting policies, executive pay and compensation policy, ownership & management structure, and overall ethical behavior.

Human influence is unequivocally to blame for the warming of the planet and some forms of climate disruption are now locked in for centuries, according to a report from the U.N. Intergovernmental Panel on Climate Change. 

"This report must sound a death knell for coal and fossil fuels, before they destroy our planet," said United Nations Secretary General

-Antonio Guterres.

ESG Expectation

Companies are expected to execute at least the following:

Environment

· Publish Sustainability reports

· Limits exposure of harmful pollutants and chemicals

· Make significant efforts to lower greenhouse gas emissions

· Deploy renewable energy sources

Social

• Support Human rights and encourage diversity
• Operate an ethical value and supply chain
• Viable policies against sexual misconduct
• Structure fair salaries and compensations.
• Execute Social Responsibility Initiatives

Governance

• Constitute and embrace diversity on their board
• Employ a CEO independent of the board chair
• Practice corporate transparency
• Gender balance Management Structure

One of the major challenges in ESG is correct disclosure. Disclosure is a snap shot of data relating to an organization operational areas in Environment, Social and Governance. Environmental risks created by business activities have actual or potential negative impact on air, land, water, ecosystems, and human health. The information on which an investor makes their decisions on a financial level is fairly simply gathered. With ESG considerations, the practice has been for the company under examination to provide its own figures and disclosures

One of the solutions put forward to the inherent subjectivity of ESG data is the provision of universally accepted standards for the measurement of ESG factors. (International Organization for Standardization) ISO has provided highly researched and widely accepted standards for many of the areas covered. There are ESG rating agencies that play significant roles to check mate these data.

Recent trends and data show that many Fortune 500 companies are adopting environmental, social, and governance (ESG) practices, and investment companies are beginning to offer more opportunities to invest in ESG value chain. This is the new way to go.

In my next article, I will dive further into the subject. Thank you for reading. Please feel free to make your comments, suggestions, contributions or questions.