ESG - Business Management For The Common Good
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Companies face a new obligation. Soon, first large, and later also small and medium-sized enterprises will have to report activities in the field of ESG. As ESG-centric business practices gain ground, investment firms are increasingly tracking their performance. Financial services firms like JPMorgan Chase and Goldman Sachs publish annual reports detailing their ESG approach and financial performance.
What is ESG?
ESG is an abbreviation of the English words: environmental, social, corporate governance.
The new regulations impose an obligation on companies to report activities in this area. All this to encourage companies to take sustainable actions: mitigating and adapting to climate change, protecting water and marine resources, transitioning to a circular economy, preventing and controlling pollution, protecting and restoring biodiversity and ecosystems, and limiting the negative impact on local communities.
But ESG reporting also has another dimension. It can increase competitiveness in increasingly demanding markets. Indicators related to activities in the field of the environment, social responsibility or corporate governance are increasingly important to investors. Before they decide to recapitalize a given business, they pay attention to what activities it undertakes in the field of ESG.
Environmental criteria consider how the company protects the environment, including, for example, corporate policies on climate change. Social Criteria examines how it manages relationships with employees, suppliers, customers and the communities in which it operates.
In recent years, investors have shown an interest in putting their money where its value is.
As a result, brokerage houses and investment fund companies have started to offer exchange-traded funds (ETFs) and other financial products in line with ESG investment strategies.
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Environment, society and management
ESG investors strive to ensure that the companies they finance are responsible environmental stewards, good corporate citizens and led by responsible managers.
Environmental
Environmental issues may include corporate climate policy, energy use, waste, pollution, conservation of natural resources and treatment of animals. ESG considerations can also help you assess any environmental risks a company may face and how the company manages those risks.
Social aspects
Social aspects concern the company's relations with internal and external stakeholders.
Does it require suppliers to adhere to their own ESG standards? Does the company donate part of its profits to the local community or encourage employees to volunteer there? Do workplace conditions reflect a high level of respect for workers' health and safety? Or maybe the company is unethically exploiting its customers?
Socially Responsible Investing (SRI) is an investment strategy that emphasizes this one ESG aspect. SRI investors seek companies that promote ethical and socially conscious themes, including diversity, inclusion, community focus, social justice and corporate ethics, in addition to tackling racial, gender and sexual discrimination.
Management
ESG management standards ensure that the company uses accurate and transparent accounting methods, strives for fairness and diversity in the selection of its leadership, and is accountable to shareholders.
ESG investors may require assurances that companies avoid conflicts of interest when selecting board members and senior executives, do not use political contributions to obtain preferential treatment, or engage in illegal activities.
Main ESG criteria
Environment
- Publishes a carbon emissions or sustainability report
- Reduces harmful pollutants and chemicals
- It strives to reduce greenhouse gas emissions and carbon footprint
- It uses renewable energy sources
- Reduces the amount of waste
Social
- Runs ethical supply chains
- Avoids working abroad that may have questionable safety in the workplace or employing children
- Supports LGBTQ+ rights and encourages all forms of diversity
- It has rules to protect against sexual misconduct
- He pays a fair (fair) salary
Management
- Includes diversity on the board of directors
- Includes corporate transparency
- Someone other than the CEO is the chairman of the board
- Pushes board elections
Sum Up
The ultimate value of ESG investments will depend on whether they encourage companies to make real change for the common good, or merely tick boxes and publish reports.
Source:jpt.spe.org, investopedia.com
