ESG: The Role of Sustainable Companies
Share on LinkedIn9 Jan 2024
The acronym ESG, which stands for Environmental, Social, and Corporate Governance, refers to a system that evaluates the influence that a company or organization has on these three crucial areas. Therefore, ESG is an all-encompassing method of assessing a company's behavior and influence beyond its financial performance, with an emphasis on its contributions to society and environmental sustainability.
The Role of ESG
Corporate ESG performance has gained attention as a result of growing sustainability concerns. ESG investing funds had been widely accepted by 2020 and had even begun to beat the general market. Various governments have started to consider enforceable ESG corporate disclosure rules in the meantime. The fast rise in the stakes for non-financial corporate performance, the creation of a web of ESG reporting and rating systems and the infusion of funding and attention around ESG have all resulted in a flood of ESG-related commitments and promises from corporate players globally.
Very briefly, the Environmental (E) dimension focuses on the efforts made by a company in order to reduce its environmental footprint; whereas the Social (S) and Governance (G) dimensions refer to the company’s impact on society as well as the way a company is governed and managed.
Generally speaking, ESG is a hot topic that has sparked broad interest, as investors, consumers and regulators are placing more demands on businesses for openness, transparency and responsibility with regard to their ethical and sustainable business practices. Consequently, companies that perform well in these key areas, may gain a competitive advantage and be better positioned in the long run.
The Environmental Dimension (E)
The Environmental dimension is one of the three key requirements for improved transparency between enterprises and their stakeholders. Particularly, it deals with environmental risks and natural resource management and refers to factors related to the environment, including the company’s carbon footprint, environmental policies, and efforts made in order to minimize their impacts on the planet.
It can be noticed that there is a lack of global consensus and common framework to communicate the standards and practices of environmental stewardship. Similarly, investors and businesses trying to account for environmental risk have faced difficulties due to a lack of commonly used vocabulary, standards and rules. Each industry has unique environmental standards that are determined by how a company works and manufactures items, as well as the legislation that apply to it. Common environmental criteria across industries include:
- Carbon emissions and decarbonisation
- Pollution and waste management
- Biodiversity
- Resource efficiency
The Environmental factor considers a company's use of natural resources as well as the impact of its activities on the environment, both directly and through its supply chains. In other words, the environmental factor investigates a company's environmental disclosure, effect, and attempts to minimize carbon emissions – problems that provide both actual risks and possibilities for stakeholders and investors.
Nowadays, climate risk, water shortages, extreme temperatures and carbon emissions threaten to slow economic growth and therefore the environment can directly affect a company's competitiveness in the market. Companies that fail to address the environmental consequences of their policies and activities may face increased financial risks. Similarly, companies that fail to take sufficient steps to reduce carbon emissions or defend against environmental events such as oil spills or mining explosions may face governmental or regulatory consequences, criminal prosecution and reputational damage, which threaten shareholder value.
Climate risk may have major financial consequences, particularly for companies that fail to appropriately plan for the expected repercussions of climate change by increasing investment in new energy sources or technologies. As a result, assessing a company's environmental footprint has progressed from a 'nice-to-have' to a crucial driver of decision-making. In the same way, sustainability is now a strategic requirement for forward-thinking companies, and assessing enterprises' environmental footprints has evolved from a basic measure of corporate responsibility to an investment offer.
The Social Dimension (S)
The Social component of ESG entails taking into account how a company's activities affect society as well as how it encourages social responsibility and inclusiveness. This may involve concerns like community involvement, employee well-being, and workplace diversity and inclusion. Indeed, how a business manages its interactions with its employees, the society in which it conducts its activities and the political landscape are all included in the Social component of ESG.
Recently, there has been a growing awareness of the significance of encouraging social responsibility and inclusiveness in the corporate sector. Companies may contribute to the general health and well-being of society and foster a more varied corporate environment by implementing socially aware business practices.
Companies can implement a variety of methods to promote social responsibility and inclusiveness and to embrace more socially conscious business practices. Here are a few examples:
- Implementing diversity and inclusion initiatives to create more inclusive and diverse workplaces;
- Engaging with and supporting local communities through philanthropic efforts, volunteering, and other forms of community involvement;
- Adopting policies that promote fair labor practices, such as paying fair wages and providing safe and healthy working conditions;
- Incorporating social and ethical considerations into decision-making processes, such as considering the impact of business operations on communities and the environment.
Through shareholder resolutions and communication with management, investors may also interact with businesses on social ESG problems. Investors may contribute to the development of a more socially responsible corporate environment by increasing public awareness of social responsibility and inclusiveness concerns and motivating businesses to adopt socially responsible practices.
The Governance Dimension (G)
The "G" in ESG stands for the Governance aspects of decision-making, which range from the formulation of policies by decision-makers to the allocation of rights and duties among various stakeholders in organizations, such as the board of directors, management, and shareholders. Investors may check for proper governance processes by looking at governance variables, which show the laws and regulations for nations and organizations. Corporate governance structures' fundamental components include a corporation's mission and structure, board composition, business ethics, anti-corruption, shareholder rights and the way in which corporate success is assessed.
Since inadequate corporate governance standards have been at the center of some of the major business scandals, it is crucial to evaluate governance risks and opportunities while making business decisions. Companies that perform poorly in the area of good governance are more prone to management errors and run the risk of being unable to take advantage of future business prospects. The success of a company can be assessed by evaluating four key factors, including:
- Structure and oversight
- Code and values
- Transparency and reporting
- Cyber risk and information systems
The Importance of ESG
ESG contributes to a more sustainable society and a better environment. It is assisting in the reduction of carbon emissions across major economies, the reduction of deforestation, the improvement of energy efficiency within businesses, and the creation of a circular economy. Investments based on ESG practices may result in several benefits to both the society and the environment, including:
- Reducing environmental impacts
- Improvement of public health
- Creation of jobs
- Reducing financial risks associated with environmental, social or governance issues
- Social stability
ESG is significant in business as well and this is due to a variety of reasons. To begin, ESG is an important factor in company performance and the best indicator of environmental, social, and governance success. Companies with stronger ESG indicators enjoy higher returns on equity, reduced risk, and lower cost of capital. This indicates that companies that prioritize ESG can outperform those that do not. Also, this is important because:
- It may boost a company's image and reputation, attracting new investors;
- It has the potential to influence the triple bottom line through new rules enacted by governments all around the world;
- It compels businesses to innovate, resulting in a plethora of new chances;
- It improves the relationship with stakeholders
How NUS Can Help
NUS work with a number of ESG divisions within global companies across key sectors including financial services, real estate, pharmaceuticals, food/drink and manufacturing. As experts in energy and sustainability, our team are able to quantify all applicable carbon emissions and develop tailored decarbonisation and sustainability strategies to improve the ESG performance of companies.
Contact us for more information.
More: Energy Market Commentary, Decarbonization, Energy and Sustainability Services (ESS), Environmental, Social, and Governance (ESG)
