What is ESG? Connecting finance and sustainable development
ESG values have rekindled sustainability in various sectors of the economy and promise to influence companies’ daily lives directly. Do you really know what this acronym means?
Good environmental, social and corporate governance practices are on the rise in the economy and have triggered a movement of change in companies worldwide.
New generations have an almost intrinsic concern with issues such as the environment and a positive impact. In the last decades, this mentality has gained breadth with the UN Sustainable Development Goals’ disclosure, which include goals for mitigating environmental risks and expanding human rights.
This new panorama was reflected, of course, in business. Year after year – and more and more – these transformations are necessary for companies to be up to date with society’s demands and survive them. The last frontier of this evolution is the popularization of ESG values, which first emerged in the financial sector and then overflowed into day-to-day offices.
ESG aspects represent a definite turning point for a sustainable mindset, especially in large corporations. Keep reading and discover everything that this acronym stands for!
What are ESG values?
Whatever industry sector you are in, you probably have come across the acronym ESG – or ASG, in the Portuguese version. The acronym refers to the terms environmental (environmental, English), social, and governance.
Together, these pillars suggest a level of commitment by companies to make their operations more responsible for sustainability, social impact, and corporate management.
With the arrival of a new workforce on the market, it is natural for some practices to change over time – and this has a direct impact on business. This adjustment requires a better understanding of the corporations on the values that govern the new times.
The ESG principles were created to assess companies’ ability to interpret what is happening in society and translate those values into the business. For the market, this generates a positive correlation between sustainability and business stability.
The environmental, social, and governance triangle
In each of the 3 ESG principles, there are a series of new variables that help investors understand the companies’ modus operandi in which they are depositing their money. Check out some of them:
The environmental criterion is related to how organizations act concerning sustainability goals, whether from the way they use energy, discard waste, or emit polluting gases in their activities.
The environmental issue covers issues such as:
- Air and water pollution
- Conscious consumption of resources (energy and water)
- Energy efficiency
- Use of non-renewable natural resources
- Biodiversity preservation policies
- Anti-disaster measures.
The social factor is vital for guaranteeing the rights and safety of employees, training, and concern for diversity and equity in staff. It also refers to constructing a more transparent and two-way relationship with the communities involved in the production process, consumers, and society.
Check out actions that are part of the social scope of ESG:
- Diversity and inclusion
- Employee engagement
- Labor policies
- Respect for human rights
- Workforce training.
On the other hand, governance refers to the way in which a company is managed by its partners, senior management, and other leaders, as well as the relationship between senior management and other employees.
Good governance practices include:
- Ethics and transparency
- Diversity in the board of directors
- Board independence
- Structure of tax audit committees
- Senior management remuneration policy
- Existence of an official complaint channel and prevention of corruption.
Why isn’t this more of the same?
Now that you know what ESG is, you must be thinking, “I’ve seen this before.” So-so. When we talk about sustainability and responsibility criteria, you must be thinking about CSR (Corporate Social Responsibility).
Famous corporate social responsibility is like ESG’s big sister. These themes have indeed been present in companies long before the current phenomenon, but there are some fundamental differences.
CSR is an initiative that emerges to standardize the implementation of positive impact measures in companies in relation to the environment, communities, and employees. So far, everything is the same.
However, corporate responsibility exists as a form of self-regulation. It is exclusively up to the organizations to render an account if they reached or not objectives that they decided themselves.
ESG is different because it has information based on objective criteria and sub-criteria and guided by scoring systems controlled by institutions linked to the financial market, such as the Stock Exchange. This ranking provides investors with complementary information for decision making.
Why is ESG so crucial for companies?
ESG indicators stem from a greater need for investors to have more transparent information about how organizations address today’s complex issues, such as sustainable development and wage equity.
Although issues related to business ethics and governance have always been debated, for a long time, organizations have tried to push this under the rug based on a false dichotomy: the argument that joining the sustainable cause was against profitability.
Now, the financial market agents have shown precisely the opposite. Companies have been pressured – directly and indirectly – to include strategies and actions of social and environmental commitment in the agenda. And rightly so.
According to the Global Sustainable Investment Alliance, so-called “responsible investments” account for about US $ 31 trillion worldwide – 36% of total financial assets under management.
How do ESG indicators work?
ESG indicators provide an accurate analysis of the quality of a company’s management and the degree of business structure. This set of elements almost always results in better financial performance on the stock exchange and greater resilience in the face of market fluctuations.
The measure has a “domino effect” in the investment world. If someone puts ESG shares in their portfolio, companies that do not share this orientation are under financial pressure to adapt.
However, nobody certifies that a corporation complies with ESG criteria. The companies declared themselves based on the publication of sustainability reports and positioning in rankings, such as B3.
For this reason, the adoption of these new standards by the financial sector has staunch allies in terms of inspection in the media and social networks. Today, at the slightest sign that a company is involved in corruption schemes or reports of abuse with employees, the market reacts promptly.
This transparency reduces investment risk for investors, nurturing the decision-making process with precise references on how companies manage their business.
ESG is here to stay
In January 2020, Larry Fink, CEO of BlackRock, wrote a letter addressed to companies’ leaders receiving investments from the group. The businessman announced that the company would now consider the “ESG risk” for credit and liquidity assessments.
Fink’s move could have been just another company signaling the need to reconcile social and environmental responsibility with business – if BlackRock were not the largest investment manager in the world.
At that time, Larry Fink turned a market trend into a requirement. Now, ESG is about to consolidate itself as market ethics.
The fact is that the ESG parameters arrive to redefine companies’ priorities – and to overcome the myth that profitability and purpose are different paths. More than that: this new standard states that both are directly associated.
The movement is growing and initiates a collective conscience in business for more responsible and sustainable production, relationship, and management practices. The organizations that best understand these new values tend to retain the best talents and have their shares valued in the market.
How is your company positioning itself against this new trend? If you have questions about how to position yourself, contact our experts. Let’s have a chat about sustainability and business?