Historically, the primary goal for corporations was the return on investment for shareholders. Today, that viewpoint is shifting. It has become increasingly important for corporations to consider their impact on the earth, society, and their consumers. That isn’t to say that profit is no longer king, because, of course, it is. Corporations simply have more factors to consider when deciding how they will position themselves in the market and industry with these newer ESG criteria.
The acronym ESG stands for Environmental, Social and Governance and refers to the ways in which investors and organizations analyze aspects of the company or opportunity for value and effectiveness. The term ESG was first used in a landmark study entitled “Who Cares Wins” back in 2005 which was followed by the launch of the UN Principles for Responsible Investment (PRI). ESG investing has become a much more commonplace idea in the last fifteen years and isn’t only investors who are looking deeper at these factors. More and more people are paying attention to these standards for ethical company operations. Today, more and more evidence indicates those asset owners that integrate ESG considerations into investment decisions not only promote environmental protection, healthier societies, and good governance but have a positive and recognizable impact on their beneficiaries’ bottom lines. ESG investing is sometimes referred to as sustainable investing, responsible investing, impact investing, or socially responsible investing.
For more on how ESG initiatives and honorable investing go hand in hand, check out this blog post.
The Environmental Component
The environmental portion of the ESG criteria considers how a company performs as a steward of the resources they use and/or affect in their operations. The company’s environmental impact is evaluated to consider the following: the energy consumed for operations, the pollution emitted, waste produced, the conservation of natural resources, and the ethical treatment of animals. This category focuses on an organization’s outputs and inputs. The outputs of a company consist of what and how much the organization produces. An organization’s inputs factor in the sustainability of the resources that the organization requires to feed its processes.
ESG criteria are often used as a tool to exclude certain industries, countries, products, or services from investment portfolios and manage risk. “Apart from the ethical component, ESG standards are developed to help investors avoid firms at risk of suffering tangible losses as a result of their ESG practices,” says Investopedia. “A company might face environmental risks related to its ownership of contaminated land, its disposal of hazardous waste, its management of toxic emissions or its compliance with the government’s environmental regulations.” These environmental reports are frequently used in evaluating environmental risks of a new venture or expansion. Following a risk assessment, the organization can decide who and how they would like to manage those potential risks.
Who is conducting ESG Audits and what are they looking at?
Audits are done pertaining to the ESG criteria for multiple reasons. As the environmental and social landscape begin to gain more of a place in investor and consumer decision making, corporations are opting to prioritize these initiatives. It is becoming an increasingly popular way for the newer generations of investors, in particular, to screen and evaluate potential investments. Investors are demanding better information and a better framework to identify the risks and opportunities of a particular investment. Investors interested in the environmental elements of a company’s structure may ask questions about the environmental impact and risk a venture poses. These questions can focus on climate change, fossil fuels, carbon emissions, and water.
Not every investor or company has initiatives or goals for all three aspects of the ESG audit. Few organizations will manage to excel in all three categories, so it is common for an organization to put more emphasis on one or two of the ESG categories depending on the industry, investors or consumers the organization is trying to reach.
Real Examples of ESG: Environmental Risks
Corporations have a variety of things to review when considering their environmental impact. For example, a beverage producer may be concerned with sufficient, long-term availability of freshwater while also being aware of any environmentally undesirable byproducts of its production processes.
Everyone remembers the traumatic BP oil spill in 2010. This accident is evidence of the tangible environmental risks associated with doing business and how those errors can play into the ESG standards. This particular disaster caused falling stock prices and billions of dollars in losses. The cost of the oil spill clean up was astronomical and caused more scrutiny into the environmental practices of not just BP, but the oil industry as a whole in the US.
Another more recent and costly example of corporate environmental stewardship is the car manufacturer, Volkswagen. Volkswagen’s 2017 emissions scandal could possibly cost the company upwards of $35 billion. People were outraged when the error was uncovered and the incident is costing the corporation more than just money. It can take a lot of time and reputation management budget to turn around large scandals and issues such as these examples above.
There are even environmental and sustainability conferences and seminars directed at creating change in the corporate sphere. Across the globe, these environmental initiatives are taking hold. There will even be a “Global Sustainability Forum” this year in Yunnan, China with the theme of “Forging a New Environmental Consensus.” As more and more “Green” initiatives begin rolling through the corporate landscape, the environmental elements of ESG will continue to gain importance.
Making the Transition
Tracking and implementing new practices such as these ESG criteria can be difficult. Using a digital board portal can simplify the meeting, document distribution, voting etc. to make these transitions much easier.
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