Prior to the emergence of ESG (Environmental, Social, Governance) a company would typically house their sustainability management information within the function of Corporate Social Responsibility (CSR). However, it is important to understand that CSR and ESG are very different, both in terms of their origins and how they impact business operations.
In broad terms CSR is highly focused on philanthropy and often serves as a keystone for corporate culture. Giving employees, investors, and consumers insight into a company’s values. ESG on the other hand, is rooted in determining a company’s long-term sustainability, and how it may influence its future financial performance and resilience. ESG factors also provide insight into a company’s impact, from nature and communities to the broader economy.
ESG was coined in 2005 by financial actors seeking to address the integration of non-traditional factors and value drivers into financial market research, analysis and investment. ESG factors are matters that may have a positive or negative impact on the financial performance or solvency of an individual, entity or sovereign. They are also very often interlinked, making it a challenge to classify an ESG matter as only an environmental, social, or governance issue. However, they typically display one or more intrinsic features that may aligning with the following definitions:
Environmental
Refers to an organisation’s environmental impact(s) and risk management practices. For example:
- Climate change and carbon emissions
- Air and water pollution
- Biodiversity
- Deforestation
- Energy efficiency
- Waste management
- Water scarcity
Social
Refers to an organisation’s relationships with its stakeholders. For example:
- Customer satisfaction
- Data protection and privacy
- Gender and diversity
- Employee engagement
- Community relations
- Human rights
- Labour standards
Governance
Refers to how a company is led and managed. For example:
- Board composition
- Audit committee structure
- Bribery and corruption
- Executive compensation
- Lobbying
- Political contributions
- Whistleblower schemes
ESG matters can be used to evaluate a company’s long-term sustainability, and how it may influence its future financial performance and resilience. This is of great importance to a company’s stakeholders (internal and external) and business partners (including banks and investors). There is increasing evidence that a business strategy focused on material ESG matters is synonymous with a high-quality management team and demonstrating that there is a positive relationship between ESG and an organisation’s financial performance. Sustainability initiatives at corporations appear to drive better financial performance due to mediating factors such as improved risk management and more innovation.
If you would like more information on ESG or how your company can get started with developing and ESG Strategy, please get in touch with one of our experts via www.pragmatica.com
