Akriti Shrivastava, a volunteer at Skillseed and an experienced social development professional across the non-profit and corporate sectors, shares about ESG and why it matters in today’s context.
“The world’s first trillionaire will be a green-tech entrepreneur”
2020 will be remembered as the year in which environmental, social and governance factors solidified their position as a dominant and permanent feature across the financial landscape. ESG is the acronym for Environmental, Social, and (Corporate) Governance, the three broad categories or areas of interest for socially responsible investors who consider it important to incorporate values and concerns into their selection of investments instead of simply considering the potential profitability and/or risk presented by an investment opportunity. Different labels like sustainable investing, socially responsible investing, ethical investing and impact investing all form part of ESG investing, with ESG factors covering an extremely broad range of issues. ESG-oriented investing has experienced a meteoric rise—global sustainable investment now tops $30 trillion, up 68 percent since 2014 and tenfold since 2004.
WHAT ARE THE ESG FACTORS: The ESG factors are a set of non-financial performance indicators that assess a company’s impact on the world and on their own resilience and profitability. Within each ESG category are various specific related concerns. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers and the communities where it operates. Corporate Governance are the areas that concern the management of a company - its board, shareholders and the various stakeholders in that company.
Examples of ESG metrics
Source: Making sense of ESG
HOW IS ESG DIFFERENT FROM CSR? CSR is considered as a catch-all for sustainable, socially conscious business practices which offers a recognised route for businesses to be more socially accountable. The remit is broad and entirely self-regulated. While CSR aims to make a business accountable, ESG criteria make its efforts measurable. The concept of ESG renews and updates the concept of CSR and organises the most relevant factors into three areas, establishing a series of criteria that define what sustainable and responsible investment is. The rise of impact investing has led to the demand for ways to rank companies on their ESG performance. ESG scores and ratings have been developed, targets are set and reported on. For many businesses, CSR is an add-on to their main purpose and overall direction. ESG policies on the other hand require that they be embedded in the core of a business’s strategy. Its momentum is being driven by asset managers, consumers, and employees demanding transparent, purpose-led business practices that align with their own priorities.
WHY ESG MATTERS? There are a number of financial and non-financial benefits that correlate to companies that pursue a high ESG performance such as:
More attractive to investors: Green investment funds and socially responsible investors are more likely to fund companies with good ESG scores.
Better performance: Studies show that portfolios with high ESG scores outperformed competing investments.
Better financial indicators: Studies show that high-ESG companies experience lower cost of capital, less volatile earnings and lower market risk compared to low-ESG companies.
Reduced regulatory and legal interventions: Evolving business models minimise the impact of disruption from technology or regulation.
Positive brand image. Companies with high ESG values may experience better retention rates and a more positive brand recognition amongst their staff and customers.
HOW DO COMPANIES BUILD AN ESG PROGRAM? To successfully navigate the complex and evolving ESG landscape, companies should adopt a clear ESG framework such as:
Source: ESG Program Framework
HOW DOES ESG IMPACT ASSESSMENT AND INVESTING WORK?
Impact: There are standardised frameworks to determine the impact. The most popular one is the UN’s Sustainable Development Goals (SDGs), composed of 17 goals, 169 targets and 232 indicators. Of the 17 goals, several can be directly tied to a company’s operations. Clean water and sanitation, sustainable cities and communities, climate action, responsible consumption and production are some of the goals businesses can tackle. In turn, when assessing a company, the measures it has or has not put in place to achieve such goals can be evaluated to determine its ESG impact. The six Principles for Responsible Investment and the Equator Principles are also incredibly valuable resources that can be leveraged to help establish questionnaires and evaluation criteria.
Investing: ESG investing is investing in companies that score highly on environmental and societal responsibility scales as determined by third-party, independent companies and research groups. ESG research firms produce scores for a wide range of companies, providing a clear and handy metric for comparing different investments. The rating firms tend to rely on multiple criteria to evaluate each of the individual E, S and G components following a pattern of data collection, analysis, conclusions, recommendations, scoring. They commonly review things like annual reports, corporate sustainability measures, resource/employee/financial management, board structure and compensation. Scores may vary among firms, which may employ different metrics and weighting schemes. They generally follow a 100-point scale: The higher the score, the better a company performs in fulfilling different ESG criteria.
WHAT ARE THE CHALLENGES OF ESG AND HOW TO OVERCOME THEM?
Lack of transparency, reliability and comparability of ESG data. Not all companies will be willing or able to provide the same levels of transparency regarding their policies and practices. The lack of universal standards and regulation in the areas of environmental and social practice mean that the measurement of such statistics is subjective. Companies adopt varying international standards hence generating incomparable outputs. Continued efforts are needed in this area, so that key data will no longer be as challenging to acquire and verify. One of the solutions put forward to the inherent subjectivity of ESG data is the provision of universally accepted standards for the measurement of ESG factors.
ESG Ratings: A lack of clear standards and significant differences in the data collected stand out as a challenge when it comes to ESG ratings. Different companies will conclude different scores based on their analysis and interpretation of the information gathered. Another key challenge that can affect rating results is the quality of the information found or provided. Beyond issues of the data’s quality lies the question of its veracity. The Global Reporting Initiative (GRI) has developed a methodology for corporate reporting on ESG issues that aims to help standardise how businesses report on their ESG related policies. This, in turn, helps improve the availability of useful information.
Different organisational size challenges: When assessing businesses’ ESG impact, a one-size-fits-all approach is unlikely to yield trustworthy results. A startup will not have the same resources available to put in place the same ESG strategies big corporates might. ESG ratings need to be adaptable enough to prevent unfair judgements of smaller companies when compared to large corporations.
CONCLUSION
If we think of the market as a formula one race, with profit representing how fast the car goes, then ESG performance shows how the conduct is on the race track and what kind of car is being driven. The most widely held view of the importance of ESG factors is that a well-run and responsible company that makes an effort for its employees, customers and the environment/communities is more likely to exhibit a greater level of resilience and outperform its peers than one that does not. Looking at environmental, social, and governance risks alongside financial metrics parameters could make us better prepared in the future for unforeseen risks, such as those we have experienced during the pandemic, and emerging risks like the climate crisis. This is one of the main reasons why integrating ESG into the investment decision-making processes today is so important and increased awareness of a corporate’s impact on society and the environment means ESG investing will continue to gain relevance.
If you see social and environmental bottom-lines as areas of strategic responsibilities, we at Skillseed are excited to partner and grow your CSR programme and ESG efforts. Through the lens of the People, Public, and Private sectors, we have developed our expertise in the environmental sustainability context and offer experiential learning courses in Singapore and overseas to address this multifaceted issue. Our Human-centred Leadership & Community Engagement (HLCE) framework and Integrated Social Innovation Toolkit helps to equip, empower and grow teams which will contribute to their organisation and society at large. Our asset-based, skills-focused community partnership model helps to hone your team’s talents to address real world causes.
Leverage our experience and established network of local communities and social sector partners to upskill for impact and development.
Contact us to explore a possible win-win partnership together!
REFERENCES:
https://corporatefinanceinstitute.com/resources/knowledge/other/esg-environmental-social-governance/
https://www.alva-group.com/blog/whats-the-difference-between-csr-and-esg/
https://medium.com/carbonclick/what-is-esg-and-why-is-it-important-f9036bb96d66
https://earlymetrics.com/esg-ratings-how-can-a-business-environmental-and-social-impact-be-measured/
https://www.forbes.com/advisor/investing/esg-investing/#3086b3b16951