What is ESG?

the first of our 11 part series on ESG.

ESG: a way for businesses and other organizations to measure and manage their sustainability in environmental, social and governance domains.

ESG stands for Environmental, Social and Governance–the three pillars of an environmentally and socially responsible company. The objective of ESG is to identify all non-financial risks and opportunities that are present in a company’s daily operations.

ESG recognizes that companies do not exist in a bubble, but rather in an ecosystem of structures and people with a vested interest in what your company does. This includes employees, customers, investors, vendors, suppliers, and government regulators. 

ESG requires transparency. New ESG reporting and monitoring systems ensure your business does what it promises to do. In the past, it was enough for a company to be “green” or “socially diverse”. Now you need to prove you are meeting widely accepted standards and consistent reporting rules.

Businesses that excel in ESG make sure that their mission and ESG approach are complementary. They weave together environmental, social and governance objectives with the key principles that define the company. Each pillar of ESG means something different for each organization relative to its operating sector, core mission, and guiding principles. This is also known as ESG materiality.

The E stands for “environmental”–how a company treats the Earth. 

Environmental criteria include:

• Resource use
• Greenhouse gas emissions
• Forest management
• Waste and pollution reduction 
• Biodiversity 

The S in ESG refers to ‘Social’. Social responsibility is how a company looks after its people. These include employees, contractors, vendors, and customers.

 Social criteria include:

• Employee relations 
• Diversity and inclusion 
• Community relations 
• Working conditions
  • Rules around age limits for workers, pay 
  • Safety and cleanliness of buildings, equipment and company facilities and practices. 

The G in ESG is all about governance–the way the company is run. It refers to the ethics of the board and managers, as well as how diverse a board is in its people, its viewpoints, and its actions taken to support or reinforce this diversity.

 Governance criteria include:

• Board diversity and structure 
• Executive salaries and compensation practices
• Tax management strategies
• Rules for approved donations and political lobbying
• Rules to prevent conflicts of interest, corruption or bribery

Governance also goes beyond compliance criteria to include your company’s:

• Vision and mission
• Culture
• Interactions with allies 

Did you know: The term Corporate Social Responsibility (CSR) has been around since Adam Smith wrote The Wealth of Nations in 1776. But like many terms, its meaning has evolved. ESG defines the key elements of a corporate social responsibility program for the 21st century. ESG promotes transparency and accountability — what is done, proven, and reported rather than what a company promises.

References:

Fuhpe, Z. (2021). Why Good Corporate Governance Goes Beyond Mere Compliance.  Retrieved on August 19, 2022 from Market Business News (MBN) (n.d.) What is ESG: Definition and meaning. Retrieved on July 15, 2022 from https://marketbusinessnews.com/financial-glossary/esg-definition-meaning/

Yaney-Fisher, M. (2022). The E in ESG and why the S and G are equally important. Retrieved on July 22, 2022 from https://www.esggo.com/blog/the-e-in-esg/

Fuhpe, Z. (2021). Why Good Corporate Governance Goes Beyond Mere Compliance. Retrieved on August 19, 2022 from https://www.esggo.com/blog/the-e-in-esg/