Environmental, Social and Governance (ESG) is the term used to identify themes that have historically been associated with sustainability and/or corporate social responsibility. However, ESG extends beyond shareholder primacy and considers the impact of a given enterprise on the community that it serves, the environment in which it operates together with a system of governance that ensures that adequate controls are in place.
The environmental criteria (E) include the energy that a company takes in and the waste that it discharges, the resources it needs, and the consequences for living beings. ‘E’ includes carbon emissions and climate change. Every company uses energy and resources; every company affects, and is affected by, the environment. Environmental themes include:
Contribution to climate change through GHG emissions
Pollution control
Impact on biodiversity
Impact on water resource
Contribution to a circular economy
Social criteria (S) address the relationships that a company has and the reputation that it fosters with people and institutions in the communities where they do business. ‘S’ includes diversity, equality and inclusion. Every company operates within a broader, diverse society. Examples of associated themes include:
Human rights
Modern slavery
Child labour
Workplace safety
Employee welfare
Diversity and inclusivity
Global and local community relations
Governance (G) is the internal system of practices, controls, and procedures your company adopts to govern itself, make effective decisions, comply with the law, and meet the needs of external stakeholders. Examples of governance themes include:
Executive pay
Board diversity
Political lobbying and donations
Tax strategy
Business ethics
Bribery and corruption
When we talk about ESG, we are referring to how institutions use the above to evaluate their impact. Companies, regulators, investors and the wider stakeholder community are increasingly focussed on ESG metrics in response to the climate crisis and urgency around diversity, inclusion and equality. ESG performance affects corporate reputation, finance and consumer preference amongst others.
How does ESG adoption drive value? More to follow…
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