ESG 101: All You Want to Understand About Environment, Social, and Governance

ClimateAngels | Sep 12, 2023

“In an era where ESG principles have firmly taken root in the business world, the realm of ESG rating firms is undergoing a remarkable surge in growth. To successfully navigate this ever-evolving space, gaining a profound comprehension of Environment, Social, and Governance (ESG), ESG scores and the complete understanding of ESG factors and their pivotal role in contemporary investment and business choices is imperative.🌱 What exactly constitutes an ESG score? 📊 Why does ESG hold such significance? And how can businesses procure their very own ESG report? Dive in to explore, know, discover, and understand more.” 😎

image-with-a-green-plant-and-an-electric-circuit-in-green-behind-the-plant

Consider these three letters: ESG. At first glance, they might signify anything, but in a world increasingly focused on enhancing the planet Earth’s well-being and shaping a sustainable future, these letters resonate with something fundamental: ESG = ‘Environment, Social, and Governance.’

In the realms of B2B and green investment, ESG has emerged as a ubiquitous and highly sought-after term.

Keep scrolling as we delve into this most-searched topic, exploring its profound impact and relevance in today’s ever-evolving ESG space.

What Is ESG 101? Its Principles and Offerings

Definition of ESG 101: ESG, or Environmental, Social, and Governance, is like Captain Jack Sparrow’s compass for businesses. (BTW, Captain Jack Sparrow is everyone’s favorite from the Pirates of the Caribbean film series).

The ESG compass helps enterprises and businesses across the globe navigate the challenges and opportunities beyond just making money. ESG guides companies to report on how they impact the environment, society, and their own governance.

This way, common people can see the bigger picture of their actions and make better choices for a sustainable future.

👉 Here’s a Short Video for You to Make Sense of ESG:

ESG vs. Corporate Social Responsibility (CSR): What’s the Difference?

ESG is closely related to and often considered a component of Corporate Social Responsibility (CSR).

👉 Here are the basic differences between ESG and CSR:

Environmental, Social, and Governance (ESG)

ESG factors refer to the environmental, social, and governance criteria that companies use to evaluate their own performance and the impact of their operations on society and the environment. These factors are considered when making business decisions and can include issues like carbon emissions, labor practices, diversity and inclusion, and corporate governance.

Pink Circle Diagram - Text Reads - ESG-vs-CSR

Corporate Social Responsibility (CSR)

Corporate Social Responsibility encompasses a broader set of initiatives and commitments that a company undertakes to contribute positively to society and the environment. This can include philanthropy, ethical business practices, community engagement, sustainability efforts, and more.

ESG considerations are often integrated into a company’s CSR strategy because they represent key aspects of responsible and ethical corporate behavior.

CSR and ESG Meaning;

ESG factors such as E (= Climate Change, Energy Efficiency, Green/Renewable Energy, Resource Conservation, Pollution and CO2 Emissions), S (= Labor Practices, Diversity and Inclusion, Human Rights, Community Engagement, Product Safety and Quality), and G (= Board Independence, Ethical Leadership, Corporate Governance, Anti-Corruption, Executive Compensation) are a subset of CSR.

That is, ESG focuses specifically on aspects related to environmental sustainability, social responsibility, and good governance.

A company’s ESG investing practices can be an important component of its Corporate Social Responsibility efforts, demonstrating its commitment to responsible business practices and societal impact.

Elements or Aspects Related to ESG Practices and Implementation

👉 Here are six elements within a company or investment strategy that provide a better understanding of ESG in context:

1. ESG Investing

ESG, distinct from sustainability, has specific criteria. ESG investing, or impact investing, is on the rise, driven by the belief that a company’s financial performance is linked to environmental and social factors. In 2020, ESG assets reached $1.71 trillion, growing 42% since 2018, and now account for an estimated 33% of U.S. assets under management. ESG outperformers show lower volatility (28.67% lower) and a 6.12% return.

2. ESG Metrics

ESG metrics evaluate a company’s exposure to environmental, social, and governance risks, aiding ESG integration approaches. Unlike traditional metrics, ESG metrics incorporate non-financial data. For example, AstraZeneca reports: 👇

60% reduction in greenhouse gas emissions since 2015.
2% decrease in waste since 2015.
89% of employees find it a great place to work.
49.1 non-compliance instances per thousand employees in commercial business units.

Investors use these metrics to assess ESG performance.

👉 Here’s the video to help you understand how ESG metrics work and why all investors should care:

3. ESG Policy

An ESG policy outlines a business’s principles, considering ESG-specific legislation and guidance. Crafting it involves reviewing core principles, understanding relevant laws and terms, and grasping regional and international ESG standards.

4. ESG Framework

ESG frameworks standardize ESG metric reporting. The Global Reporting Initiative (GRI) is widely used, covering responsible environmental, social, economic, and governance conduct. It simplifies ESG reporting for assessments.

5. ESG Reporting

Best ESG reporting practices disclose data using ESG metrics, offering insights into a company’s impact on the environment, society, and governance. It helps investors screen investments by summarizing quantitative and qualitative information, improving transparency.

6. ESG Certification

ESG certification involves an audit assessing ESG risks using chosen standards and frameworks. It compares ESG metrics to predefined benchmarks to gauge a business’s ESG performance, validate efforts, and identify improvement opportunities. Third-party sustainability assessments, like GBB, can boost ESG performance.

Simplifying Sustainability and Related Concepts for Businesses

1. Sustainability: Often linked to climate action, social responsibility, and reducing plastic use.

2. Corporate Social Responsibility (CSR): Guides socially responsible business practices.

3. Green Business: A term frequently used but sometimes diluted in meaning.

4. Sustainability Strategy: Prioritized actions for long-term environmental, social, and economic sustainability.

5. Sustainability Program: Actionable roadmap reporting measures and activities.

6. Sustainability Plan: Action courses within a sustainability program.

Why Should Businesses Care About ESG and ESG Reporting?

Businesses should prioritize Environment, Social, and Governance and ESG reporting for these seven compelling reasons: 👇

1. Risk Mitigation: ESG practices prepare companies to tackle evolving regulations, safeguard reputation, and meet sustainability and social responsibility standards. Non-compliance can lead to legal and financial consequences.

2. Operational Efficiency: ESG initiatives drive operational efficiency, reducing energy consumption and utility costs.

3. Sustainable Value Chains: Partnering with ESG-aligned suppliers enhances sustainability throughout the value chain, reducing risks associated with non-compliant suppliers.

4. Innovation: An ESG mindset fuels innovation, opening new business opportunities and providing a competitive edge.

5. Attracting Investors: Investors increasingly consider ESG performance, and strong ESG practices correlate with long-term success.

6. Enhanced Reputation: Addressing sustainability concerns sets businesses apart from competitors and strengthens brand image.

7. Talent Attraction and Retention: Younger generations prioritize environmental and social issues when choosing employers, making robust ESG practices essential for attracting and retaining top talent.

👉 Here’s the video to understand Environment, Social, and Governance and ESG reporting better:

5 Reasons Why Companies must have a Strong ESG Plan

What’s The Best Strategy for Companies to Implement the Best ESG Practices?

👉 Here’s the perfect step-by-step ESG planning for any size of business: 👇

Step-1. Set Clear ESG Goals: Begin by defining specific ESG objectives tailored to your business.

Step-2. Prioritize Relevant ESG Issues: Focus on ESG concerns that directly impact your business for maximum effect.

Step-3. Regular ESG Assessments: Conduct periodic ESG reviews to track progress and identify areas for improvement.

Step-4. Embrace Sustainable Finance Practices: Reduce environmental impact through sustainable finance practices such as waste reduction, energy conservation, and responsible sourcing.

Step-5. Integrate ESG in Decision-Making: Incorporate ESG considerations into decision-making processes, possibly by establishing an ESG committee or assigning responsibility for ESG practices.

Step-6. Monitor and Report ESG Performance: Continuously monitor and report on ESG performance to demonstrate transparency and commitment to these principles.

What is an ESG Score and Who Uses it?

ESG Score acts like a Business Compass 🧭 for your company.

An ESG score, short for Environmental, Social, and Governance score, is like a compass for businesses (including small and medium size enterprise – SMEs) in today’s sustainability-driven world.

This ESG metric, provided by third-party agencies, quantifies a company’s ESG efforts, offering stakeholders a way to compare and assess various organizations.

Why ESG Score Matters 📊

Here: 👇

1. Validation: A high ESG score publicly validates a company’s commitment to ESG efforts.

2. Competitor Comparison: It allows investors and stakeholders to compare companies based on their ESG performance.

3. Industry Benchmarks: ESG scores help establish industry-wide benchmarks.

4. Tracking Progress: Companies use these scores to gauge their progress toward ESG goals.

5. Risk Identification: ESG scores highlight potential risks, prompting organizations to take action.

6. Investor Appeal: Investors consider ESG scores when making investment decisions.

7. Reputation Enhancement: Strong ESG practices set companies apart and enhance their brand image.

8. Talent Attraction: Companies with robust ESG practices attract and retain top talent.

Behind the ESG Scores 📈

Different rating firms employ distinct criteria and algorithms to determine ESG scores. They gather data from various sources, including voluntary disclosures and government databases.

ESG Scores are categorized as Excellent, Good, Average, or Poor, reflecting a company’s ESG performance.

👇

Fun Colorful Blackboard - Talking abut ESG Score

Regulatory Outlook 🌐

Regulations are emerging to standardize ESG terminology and rating methodologies:

👇

UK: A new voluntary code of conduct for ESG rating firms is underway, with potential mandatory regulations on the horizon.
US: Calls are growing for SEC regulation, although no formal steps have been taken yet.

EU: The European Commission is proposing regulations that would subject ESG rating providers to authorization, ensuring transparency and reducing conflicts of interest.
India: ESG rating practices in India vary among agencies, with no standardized criteria. However, here’s the link to understand how ESG ratings methodology works in India: S&P ESG India Index Methodology by S&P Dow Jones Indices – S&P Global.

Regulations aim to unify ESG terminology, enhance transparency, and combat greenwashing. While they set higher standards, they also strengthen trust in ESG ratings—a win-win for businesses and sustainability.

Now that you have an 80% understanding of ESG, let’s shift our focus to its investment perspective, market value, and predictions for the remaining months of 2023 and the upcoming year, which is just three and a half months away.

How’s the ESG Investment Market in 2023?

One ESG prediction for 2023, please: 👇

Scandi Desk Name Strip - A Quote About Predictions of ESG In the Remaining 2023

What has been a tumultuous year for ESG and markets in general?

Investing in ESG (Environmental, Social, and Governance) has become increasingly popular in recent years, especially in post-pandemic days. However, despite its presence in the investment industry for quite some time, there’s been a growing misunderstanding of what ESG truly means.

In response to this, regulators have stepped in to provide clarity and define what qualifies as an ESG or sustainability fund, aiming to combat ‘greenwashing.’ 👇

biodiversity-is-under-massive-threat-tim-cockerill

But, if looked deep, there’s a clear distinction between thematic ESG funds, which align with an investor’s values or ethics, and ESG funds that integrate important ESG factors with traditional performance metrics. The goal is to create long-term wealth for investors from various backgrounds and walks of life.

Also, actively engaging with companies in a portfolio to drive sustainable outcomes and improve performance can be a vital component of both types of ESG funds.

So, if you’re considering investing in ESG, rest assured that efforts are being made to ensure clarity and authenticity in this space. ESG investing aims not only to align with your values but also to generate sustainable returns over time.

ESG 101 and Sustainability: Different Terms, Common Goal

Both corporate ESG and sustainability aim to create businesses that use resources efficiently, ensuring long-term economic, environmental, and societal well-being.

Understanding these terms is crucial. Hence, you can use this article as your reference to grasp the nuances and work towards building better businesses for a sustainable future.

👉 For more insights and more details about ESG and why it is important, Check out this article: What Is ESG Investing and Why Is It Important To Consider?