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What is ESG and why is it important?
ESG measures the sustainability and ethical impacts of an organisation or a company. These measured factors are not financial performance indicators and touch on areas which include but are not limited to sustainability, ethical considerations and transparency / accountability in the area of corporate governance.
What is ESG and Why?
The significance of ESG has gained traction amongst stakeholders, investors and policymakers as a way to manage risk and safeguard the future of an organisation. The risk-mitigation of environmental, social and governance aspects of a business is often a top priority for organisations, especially those that take ESG initiatives seriously.
Environmental
The "E" represents the environmental impacts, footprint and sustainability aspects of a business or organisation. Energy consumption, pollutants and all other inefficiencies impacting the environment in an adverse way should be considered and assessed.
Social
The "S" represents anything and everything to do with people and human resources. The well-being, working conditions and relationships within the company or organisation should be considered and assessed as metrics to attribute to ESG initiatives.
Governance
The "G" represents the structure of governance within an organisation or company. What is the framework around transparency, independence and how does this translate to how it affects stakeholders and shareholders?
The Importance
ESG serves as an indicative benchmark used in capital markets to determine the progress and advancements of any given organisation or company within the area of sustainability.
With the continual risk of global climate crisis, ESG is an important part of the equation in striking the much needed balance between financial profitability and having a sustainable business. The recent pandemic has also brought to light a variety of factors that organisations need to factor in as part of the greater strategies:
- Risk mitigation and stakeholder management
- Human relations and employee well-being
- Environmental impact and organisation sustainability
Short-fall Considerations
No system is perfect, and ESG is no exception. ESG is extremely broad and covers a big area, therefore it is not easy to accurately measure and benchmark objectively and fairly.
A lot of companies are leveraging ESG as an acronym to appear strategic and demonstrate that they are on the pathway to become a better organisation or company. Unfortunately, a lot of the time different parts of the organisation view ESG differently and initiatives do not align overall to product a measurable and productive outcome.
This isn’t entirely the fault of the organisation or company, as ESG encompasses and overarches a lot of areas within a business. According to the assessment criteria of MSCI, there are a list of 37 categories that are methodically assessed in order to obtain a benchmark score. This may be a helpful indicative figure, however many also use ESG and benchmark scores to leverage ESG for its other initiatives, whilst not really producing any positive impact.
What Next?
ESG is an important metric and initiative for companies and organisations to strategically plan and execute in order to improve often non-financial areas to ensure long-term sustainability. The key take-away is that ESG enables businesses to execute and deliver with long-term resilience, future-proofing for potential risks and issues that arise.
Organisations need to take ESG seriously, not simply leveraging the acronym to garner short-term gain. With proper ESG strategies in place, business of all sizes agnostic of its sector will be able to derive and translate ESG into sustainable value delivery. Businesses are fundamentally formed with profitability in mind, so ensuring value delivery from ESG strategies is integral to the successful implementation and delivery of any long term initiatives.
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