What is Environmental, Social, and Governance (ESG)?

In board rooms around the world, ESG has become a hot topic. ESG assets have quickly gone from niche to representing almost ⅓ of global assets under management (AUM). Now, more companies than ever are adopting ESG measures to mitigate risks, identify opportunities and gain a competitive advantage. Given ESG’s increasingly considerable sway within the market, stakeholders, investors, and regulators are progressively asking for more accurate and detailed metrics on an organization's ESG performance. To provide these more detailed metrics transparently and consistently, companies utilize the evolving frameworks and software that make the process easier and more streamlined.

This article delves into what ESG is, why it’s important, and how companies can effectively report and measure their ESG performance.

What is ESG?

ESG — or Environmental, Social, and Governance — are the three overarching pillars that an organization’s effect on the environment and society can be measured.

Initially used as a tool for investors to understand a company's long-term financial performance, ESG is now central to business strategies. It assesses a company's ability to deal with the defining issues of our time, the climate crisis, environmental degradation, social injustice, and inequality.

To define what factors each of the E-S and G include, the table below lists some of the important metrics that must be considered

Performance metrics in all of the above ESG factors are no longer just good to know for investment decisions but essential knowledge for all stakeholders to measure the long-term sustainability of companies and the wider society.

Why is ESG Important?

Improved ESG performance is essential for tackling global challenges such as climate change and social inequality. Companies that excel in ESG practices are seen as responsible stewards of the environment and society, making them more attractive to investors and clients. A robust ESG strategy can also help manage risks, improve employee retention, and comply with regulations.

1. Risk Management: Effective ESG strategies help companies identify and mitigate potential risks. Environmental risks like natural disasters or regulatory changes can have significant financial impacts. Social risks, including labor disputes or negative public perception, can damage a company's reputation and profitability. Strong governance practices reduce the risk of fraud and ensure compliance with laws and regulations.
2. Investor Attraction: Investors increasingly prioritize ESG factors when making investment decisions. Companies with strong ESG performance are perceived as lower risk and more sustainable in the long term, attracting more investment capital. ESG-focused funds have seen substantial growth, highlighting the increasing demand for responsible investment options.
3. Competitive Advantage: Companies that lead in ESG practices often gain a competitive edge. They are better positioned to respond to market disruptions, attract top talent, and build customer loyalty. Consumers are more likely to support brands that align with their values, and employees prefer to work for companies with strong ESG commitments.
4. Regulatory Compliance: Regulatory bodies worldwide are introducing more stringent ESG-related regulations. Companies that proactively adopt robust ESG practices are better prepared to comply with these regulations, avoiding potential fines and legal issues.
5. Long-term Sustainability: ESG strategies contribute to the long-term sustainability of a company. By focusing on environmental stewardship, social responsibility, and strong governance, companies can ensure they remain viable and competitive in an evolving global market.

Greenwashing

With all the money going into responsible investing, it pays to be sustainable. For this reason, a growing number of companies are misrepresenting the sustainable credentials of their products and services — or greenwashing.

According to recent research, greenwashed investments are the biggest concern for ESG investors. To avoid greenwashing, companies should align themselves with established ESG frameworks and use software to ensure their sustainability disclosures are transparent and accurate.

"Legislation is getting tighter and consumers are getting savvier. If you can't quantitatively support your sustainability claims people are going to ask questions" - Emma Sweby, Climate Solutions Senior Director

ESG Reporting Standards

Reporting frameworks and standards are critical tools for identifying and evaluating ESG performance. They help companies understand, measure, and communicate their exposure to ESG risks and opportunities while promoting transparency with investors and engaging stakeholders.

Currently, there are a disparate number of standards forming a complex alphabet soup of potential frameworks (GHGP, GRI, SASB, etc.) that a company can align to. The 2021 announcement of the International Sustainability Standards Board (ISSB) aims to consolidate ESG reporting under one consistent global framework. Simplifying the ESG reporting and disclosure process. Reducing the complexity in measuring, managing, and reporting carbon is a trend seen both in the progression of frameworks and in technology.

Measuring ESG Performance

Firms have typically measured their ESG performance through cumbersome Excel spreadsheets and email communications. These methods are labor-intensive, expensive, and prone to errors. As pressure grows to measure more often, accurately, and extensively, increasingly complex ESG data collection and reporting becomes a growing issue.

That is where ESG software comes in. Through a SaaS model, ESG software companies cover all bases from an ESG data collection, management, and analysis perspective. While some focus on ESG disclosures holistically - providing resources and a platform that covers a range of ESG-related metrics. Others like Carbon Management and Accounting Platforms (CMAP) deal with the niche and complicated process of measuring carbon emissions.

One popularizer and advocate of ESG is Larry Fink, CEO of BlackRock, the world’s largest money manager. Larry has been highlighting the importance of ESG in his yearly open letter to CEOs for a decade. In his most recent letter, he reiterated how significant ESG is as a capitalistic tool for the long-term viability of a company. He even went as far as to hint that failing key ESG metrics could lead BlackRock to sell its holdings in a company.

The days of investors and shareholders basing their decisions solely on a company's financial health are gone. Responsible investing and stakeholder capitalism are now the orders of the day. Companies that do not embrace accountability in their ESG efforts will, as Fink says, “Go the way of the Dodo.” Others who adopt strong ESG measures “Will rise like Phoenixes.”