ESG basics: What you need to know?
ESG – environmental, social and governance – are three factors that businesses can use to measure their net impact on the world. Broader than profit and loss, more detailed than corporate social responsibility, ESG reviews, details and documents how a company impacts on the environment, on society and people, and their own corporate governance.
What is the main purpose of ESG?
A myriad of factors can make up an ESG report. Some stretch to over 1,000 individual data points, from carbon emissions to the proportion of women on the board to how frequently a company undertakes bribery training. Many businesses are no longer working on environmental, social and governance issues in a silo. They are bringing them together under the banner of ESG to demonstrate the positive impact their existence is having on the world.
Bringing these disparate risks together helps a company prioritise their impact on the world. It helps them understand the risks they face, and it shows stakeholders they are taking the time to conduct due diligence and mitigation measures on those risks.
What companies, investors and stakeholders at large like about ESG is that it combines all of the things that could impact a business. From regulatory faults and fines to environmental disasters and social disruption, and provides a singular measure of how well a company is able to respond to those challenges. In short, ESG measures resilience.
What are the 3 essential pillars of ESG?
There are three main aspects of ESG: reportings, ratings and regulations.
- Reportings are what the company says about itself.
- Ratings are what other people say about the company’s ESG efforts, most importantly investors.
- Regulations are government standards for ESG actions or disclosures.
Reportings
This is how a company measures its own ESG score. ESG factors are essentially the broadest set of factors which can be used to measure a company’s impact in the world: How is a business impacting the environment, deforestation, pollution and climate change? On the social front, how are they supporting communities? This includes both their employees, through health and safety measures and diversity, and also the wider society that they operate in. And on governance, how well is the company run, how diverse is its board, does it have strong anti-corruption policies and good management structures?
ESG reportings drive a huge and growing amount of investment. ESG is much like corporate social responsibility but on a vastly larger and more measurable scale. Companies who are at the forefront of talking about their ESG scores are generating more attention from across the business spectrum, and investors are actively looking for high ESG scoring companies.
Read more here about the different reporting frameworks companies can use.
Ratings
Ratings are what other companies, in particular respected ratings companies, say about a business. There is no one international standard for ESG ratings, but there are several highly respected organisations which conduct ESG audits and ratings. These include: Bloomberg, S&P Dow Jones Indices, JUST Capital, MSCI and Refinitiv are a few of the most well-regarded ESG research companies. Scores generally follow a 100-point scale: The higher the score, the better a company performs in fulfilling different ESG criteria. Scores may vary among firms, which may employ different metrics and weighting schemes.
Independent ESG ratings are useful for investors. Investors are prioritising companies’ resilience to unanticipated and potentially damaging ESG risks. ESG ratings provide a launching point for shareholder engagement on ESG performance. Investors are interested in what ESG issues could cause them harm, and which ones may create opportunities.
Regulations
The third part of ESG are the regulations. These are government rules which mandate what companies are expected to disclose, to talk about, and publish. Different jurisdictions have different requirements, but in general there is a push for more regulations around ESG. For example under the EU’s proposed new corporate due diligence and corporate accountability directive, businesses will be required to identify, address and remedy their impact on human rights and the environment.
The US Securities and Exchange Commission (SEC) is also moving forward to create a framework for ESG disclosure. The International Financial Reporting Standards (IFRS) Trustees announced in 2021 that they are forming a new board that would establish global ESG reporting standards.
You can keep up to date with the latest ESG regulations and more in our Regulatory Agenda.
What are the five 5 ways that ESG creates value?
- Improved corporate reputation: Companies that prioritise ESG issues and demonstrate a commitment to sustainability and social responsibility often gain a better reputation among customers, investors, and other stakeholders.
- Enhanced financial performance: Companies that integrate ESG considerations into their decision-making processes are likely to benefit from improved financial performance, as they are better able to identify and manage risks and take advantage of new opportunities.
- Reduced operating costs: By adopting sustainable practices and reducing waste and energy consumption, companies can lower their operating costs and improve their bottom line.
- Increased employee engagement and productivity: Companies that prioritise ESG issues and demonstrate a commitment to social responsibility can attract and retain top talent, leading to increased employee engagement and productivity.
- Access to capital: Investors are increasingly interested in investing in companies that prioritise ESG issues, and companies that demonstrate a commitment to sustainability and social responsibility may have greater access to capital and funding opportunities.
Course on ESG awareness
VinciWorks is soon releasing a course on ESG awareness. Designed for all staff, it will help everyone in the company understand what ESG is, how it impacts them, and how they can help the business meet its ESG obligations and priorities.
For more on the course or to request a demo, contact us using the form below.
