What is ESG?

Have you heard about ESG? What does it mean?

ESG stands for Environmental, Social, and Governance, which are the three broad categories of factors that investors and other stakeholders use to evaluate the sustainability and ethical impact of a company or organization. ESG criteria are increasingly being used to make investment decisions and to assess corporate performance and reputation. The figure below shows what are the different factors that constitute ESG-

Environmental factors refer to the impact that a company has on the environment, including its carbon footprint, energy efficiency, waste management, and resource consumption. Social factors refer to the company's impact on society, including its treatment of employees, human rights record, and community engagement. Governance factors refer to the company's internal systems and controls, including its leadership structure, board composition, and transparency.

How organizations use ESG?

Having understood what ESG stands for, lets understand how companies incorporate ESG factors in their operations by setting strategic goals, reporting on it and get rated its ESG performance.

Companies start by setting strategic ESG goals. Typically these goals are set in accordance to the United Nation Sustainability Development Goals (UN SDGs). The goals include tackling climate change, but also a broader range of environment, social & governance issues.

Companies then streamline their actions towards these goals and perform ESG analysis to measure their progress against the set goals. ESG analysis typically involves reviewing a wide range of information sources, including company reports, regulatory filings, news articles, and third-party data providers. The analysis may include both quantitative and qualitative assessments of factors such as a company's carbon emissions, diversity and inclusion policies, human rights record, executive compensation, board structure, and transparency.

Companies also report their progress against these goals on a regular basis, usually referred to as ESG reporting. The information is typically presented in a standardized format, such as the Global Reporting Initiative (GRI) framework, which provides guidelines for reporting on sustainability issues. ESG reporting can be voluntary or mandated by regulations or stock exchanges. In recent years, there has been an increasing trend towards mandatory ESG reporting requirements, with a growing number of countries and stock exchanges requiring companies to disclose their ESG performance and impact.

Based on their ESG performance, companies are rated by third-party organizations like DJSI, MSCI etc. These organizations specialize in analyzing ESG factors and provide independent assessments of companies' sustainability and ethical performance. ESG ratings are typically provided on a scale, with companies being rated on a score from zero to 100 or given a rating ranging from AAA to CCC, with higher ratings indicating better ESG performance. ESG ratings are not standardized, however, and different rating agencies may use different methodologies and criteria to assess ESG performance.

Investors and stakeholders are increasingly recognizing that companies that perform well on ESG factors are likely to be more resilient and sustainable over the long term, and may also be better positioned to generate positive social and environmental impacts while minimizing negative externalities. As a result, ESG criteria are becoming increasingly integrated into investment strategies, corporate reporting, and stakeholder engagement processes.

I hope you liked this article on ESG. Watch out this space for more interesting content on sustainability.