ESG
What is ESG?
ESG stands for Environmental, Social, and Governance. Corporations and Investors increasingly apply ESG factors to their performance and investment analysis to identify material sustainability risks and growth opportunities. ESG metrics are not commonly part of mandatory financial reporting, though companies are increasingly making disclosures in their annual report or in a standalone sustainability report.
What is ESG all about?
Environment
Social
Governance
Environment
Sustainability issues in the environment dimension impact a company either through the use of nonrenewable, natural resources as inputs to production, or through harmful releases into the environment. The environment aspect of ESG covers the below critical areas
– Climate change and carbon emissions
– Air and water pollution
– Biodiversity
– Deforestation
– Energy efficiency
– Waste and Hazardous material management
– Water and Wastewater management
– Ecological impacts
Social
The social aspect relates to the expectation that the business will contribute to soceity in return for building long standing relationship with all stakeholders such as the public, customers, local communities and governments.
The social dimension of ESG covers the below critical areas
– Human rights and Community relations
– Customer privacy
– Data security
– Access and Affordability
– Product quality and Safety
– Customer Welfare
– Selling practices
– Product labeling
Governance
Governance involves the management of issues that are inherent to a company’s business model or that constitute common practice in the industry and that are in potential conflict with the interest of broader stakeholders and therefore may create liabilities or hinder license to operate. The leadership & governance aspect of ESG covers
– Business ethics
– Competitive behavior
– Management of legal and regulatory environment
– Critical incident risk management
– Systemic risk management
Why should we care?
ESG matters because it provides stakeholders and investors with the ability to direct their capital to investments that are aligned with sustainable activities and investors’ own principles and values. The topics in ESG provide stakeholders and shareholders visibility into financially material sustainability issues.
Understand the company’s overall sustainability profile.
Evaluate how sustainability impacts major revenue streams and inputs to value creation.
Evaluate external operating context w.r.t sustainability (Business climate, Economics, Regulations, and Location)
Difference between sustainability & ESG?
ESG is considered a part of the much larger umbrella of sustainability.
Environmental, Social, and Governance (ESG) is a term used to represent an organization’s corporate financial interests that focus mainly on sustainable and ethical impacts. Capital markets use ESG to evaluate impacts on organizations’ future financial performance.
Take the example of water scarcity. Private Equity firms investing in agricultural lands will have impacts on water stress incorporated into the cost of capital calculations through ESG to safeguard against operational risk and ensure the longevity of the investments.
