What is ESG?

Updated: Apr 7

ESG stands for Environmental, Social and corporate Governance. Over the years, the world has become increasingly proactive in tackling social issues regarding diversity and having a more sustainable environment, it is very common for start-ups to look for an ethical way of doing business. This allows start-ups to appear to investors as a responsible investment. Responsible investing is understood as using the ESG system to cover a wide spectrum of issues within a company and to identify the risks and opportunities for an investor that were not considered in previous years. This is used during the investment decision making process.

ESG reporting in a nutshell, is the release of data outlining a company’s impact and value in three areas, Environment, social, and corporate governance.

It assesses which companies do well in each of these factors and allows investors to know if a specific company is a viable investment.

The three aspects of ESG

The environmental aspect assesses whether a company is environmentally conscious and if the company’s activities impact the environment in a positive or negative way. It also discusses how company operations which have an environmental risk are managed. Such as whether they preserve resources instead of wasting them, if they emit greenhouse gases like CO2 which speeds up climate change and lastly, how they treat animals.

The Social criteria investigates the positives and negatives in which an organisation deals with relationships with employees, customers, suppliers, and the area business is conducted. This includes how the work conditions are for the employees, the health and safety procedures to keep people safe, diversity and how company operations impact territories with conflict such as war.

Governance entails leadership within a company, executive pay, audits, internal control, and shareholder rights. A potential investor would like to know how they conduct their business behind closed doors in order for them to be trustworthy. An example would be, if the company addresses gender equity or equal pay, if the company is corrupt, and whether there is diversity within leadership roles such as the board.

The importance of ESG

The concept of ESG began in the 60’s. It was formally known as socially responsible investing (SRI). This earlier version wasn’t used for all of the companies at that time. It excluded investments in the tobacco and gun business. The term ESG was introduced in 2004 and was first studied in 2005 in a conference which examined the three aspects mentioned above.

As ESG grows and evolves from the 60’s, more and more investors are looking to implement this strategy to identify a viable investment. This is process outlines the most sustainable businesses and appears to be a great opportunity for both business owners and investors. An example of this is a United Nations sponsored group of 27 European investors committed to invest $600 billion to green/environmentally friendly projects.

In the future, there is optimism that ESG will play a much bigger role in the assessment of companies, not only by investors but by consumers and stakeholders.

As business owners strive for a more ethical business there is added pressure from the media, law makers, consumers, investors, and stakeholders for companies to apply an ESG compliant business.

For businesses to appear attractive to investors they must function well among all aspects of ESG. This is because recent studies have found that 49% of millennial millionaires will invest in the organizations that perform well in the social factors. European investors also poured €120 billion into options that are environmentally friendly and sustainable since 2019. This proves that becoming ESG compliant should be a priority for large companies and start-ups. This also shows why there is increasing awareness that ESG may become compulsory or mandatory.

Being ESG compliant allows for increased productivity among employees, reduced chance of conflict in the workplace, and less fines and sanctions handed out. Therefore, higher financial growth and optimization.

4 views0 comments