Environment, Social and Governance (ESG) – Part 1

Shot of architectural model on the table in the office

What is ESG?

Environment, Social, and Governance (ESG) refer to a trio of business standards used by socially conscious investors to screen potential investments. Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities.

Environment:

Investors will evaluate the environmental risks a company might face and how these risks are being managed

Environmental factors that businesses would address are:

– Climate change and carbon emissions
– Air and water pollution
– Biodiversity
– Deforestation
– Energy efficiency
– Waste management
– Water scarcity

Social:

Investors will evaluate a company’s business relationships and social factors.

Social factors that businesses would address are:

– Customer satisfaction
– Data protection and privacy
– Gender and diversity
– Employee engagement
– Community relations
– Human rights
– Labor standards

Governance:

Investors will evaluate a company’s internal practices and policies that lead to effective decision-making and legal compliance. 

Governance factors that businesses would address are:

– Board composition
– Audit committee structure
– Bribery and corruption
– Executive compensation
– Lobbying
– Political contributions
– Whistleblower schemes

Why is ESG Important for businesses?

In recent years, businesses have faced heightened pressures from environmental groups and non-governmental organizations to be more accountable for their actions, as well as having to navigate emerging legislation and initiatives. Together with the unforeseen risks of a pandemic and the climate crisis. Many investors and policymakers realize a greater need to accelerate investments and progress on businesses that prioritize ESG

In the US, ESG focused funds have seen more than a double jump to USD 51.1 billion from USD 21.4 billion, and a nearly tenfold increase from USD 5.4 billion in 2019. In Asia excluding Japan, managed sustainable fund assets almost tripled to USD 36.7 billion in March 2021 from a year earlier.

Consumers and Employees too are demanding social and environmental commitments from organizations. As many individuals want to work and consume products from organizations with values that align closely with their own priorities.

Part 2: Environment, Social and Governance (ESG) – Part 2

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