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

Introduction

Environmental, Social, and Governance (ESG) refers to the three central factors that measure the sustainability and societal impact of a company or investment. 

ESG criteria help investors and stakeholders assess the ethical and responsible practices of businesses and guide their decision-making processes.

The most important aspects of Environmental, Social, and Governance (ESG) can be categorized into three main pillars:

Environmental 

This aspect focuses on a company's impact on the environment, including its efforts to reduce its carbon footprint, minimize waste and pollution, and promote sustainable resource use. 

Key environmental factors include

•    Energy efficiency and renewable energy use
•    Greenhouse gas emissions and climate change mitigation
•    Water management and conservation
•    Waste management and recycling
•    Biodiversity and ecosystem preservation

Social

The social dimension of ESG evaluates a company's relationships with its employees, customers, suppliers, and the communities in which it operates. 

Important social factors are:

•    Employee well-being, diversity, and inclusion
•    Labor practices and fair working conditions
•    Health and safety standards
•    Community engagement and development initiatives
•    Human rights and responsible supply chain management

Governance 

Governance factors assess a company's leadership, corporate structure, and business ethics. Strong governance practices are essential for long-term success and risk management. Some of the key governance factors are;

•    Board composition, diversity, and independence
•    Executive compensation and alignment with shareholder interests
•    Ethical business practices and anti-corruption policies
•    Transparency and accurate financial reporting
•    Shareholder rights and engagement

The importance of ESG lies in its ability to provide a comprehensive view of a company's long-term value creation. Companies that prioritize ESG factors often demonstrate better risk management, improved operational efficiency, and stronger innovation capabilities. According to a 2022 study by McKinsey & Company, organizations with high ESG ratings are more likely to outperform their industry peers in the long run.

Rising popularity in the business world

ESG's popularity in the business world has soared in recent years, as companies and investors increasingly recognize the value of sustainable and ethical practices. According to Bloomberg Intelligence, global ESG assets may surpass $41 trillion by 2022 and $50 trillion by 2025,

Moreover, a 2022 survey by PwC revealed that 77% of institutional investors plan to stop purchasing non-ESG products within the next two years, indicating a strong shift towards responsible investments. 

Top ESG Ratings and Assessment Tools

1. MSCI ESG Ratings: MSCI ESG Ratings assess the environmental, social, and governance performance of thousands of companies and securities worldwide. The ratings range from AAA (highest) to CCC (lowest) and provide investors with a comprehensive understanding of a company's ESG risks and opportunities.
2. Sustainalytics ESG Risk Ratings: Sustainalytics ESG Risk Ratings evaluate a company's exposure to and management of ESG risks. The ratings are based on a 0-100 scale, with lower scores indicating lower risk. They cover over 12,000 companies across various industries and help investors make informed decisions.
3. Refinitiv ESG Scores: Refinitiv ESG Scores measure a company's relative ESG performance across ten themes, such as emissions, resource use, and corporate governance. The scores range from 0 (lowest) to 100 (highest) and are based on data from public sources like company reports and media sources.
4. FTSE Russell ESG Ratings: FTSE Russell ESG Ratings assess the ESG performance of companies in the FTSE All-World Index. The ratings range from 0 (lowest) to 5 (highest) and consider over 300 ESG indicators, providing investors with a detailed and transparent view of a company's ESG practices.
5. ISS ESG Corporate Rating: ISS ESG Corporate Rating evaluates a company's ESG performance based on over 100 industry-specific indicators. The ratings range from D- (lowest) to A+ (highest) and help investors identify leaders and laggards in ESG performance within each industry.
6. Vigeo Eiris ESG Assessments: Vigeo Eiris ESG Assessments analyze the integration of ESG factors into a company's strategy, operations, and management. The assessments are based on a 0-100 scale and cover six domains, such as environment, human rights, and governance.
7. Bloomberg ESG Data: Bloomberg ESG Data provides comprehensive ESG information on over 11,500 companies and over 380,000 fixed-income securities. The data includes information on environmental, social, and governance performance, as well as controversies and incidents related to ESG factors.

These ESG ratings and assessment tools help investors, stakeholders, and businesses evaluate and benchmark the ESG performance of companies, enabling informed decision-making and promoting sustainable and responsible business practices.

ESG Practices by Global Companies 

1. Microsoft: In 2020, Microsoft committed to becoming carbon negative by 2030 and removing all its historical carbon emissions by 2050. The company has also launched a $1 billion Climate Innovation Fund to support sustainable technologies.
2. Unilever: The consumer goods giant has set ambitious goals to reduce its environmental footprint, aiming for zero emissions from its operations and 50% reduction in product-related emissions by 2030. Unilever is also focusing on social initiatives, such as improving the health and well-being of over a billion people.
3. Ørsted: This Danish renewable energy company has transformed from a fossil fuel-based utility to a global leader in offshore wind energy. Ørsted reduced its carbon emissions by 87% between 2006 and 2020 and aims to become carbon neutral by 2025.

Conclusion: The Future of ESG in Business

Businesses are likely to continue integrating ESG factors into their strategies, decision-making processes, and reporting frameworks. The growing interest in ESG from investors, regulators, and consumers will further reinforce the need for companies to prioritize and demonstrate their commitment to environmental, social, and governance performance. 

In addition, advancements in technology, data analytics, and reporting standards will enable companies to better measure, manage, and communicate their ESG efforts, fostering greater transparency and accountability across industries.

15 Rock is here to help

Considering all of the facts about ESGs you can now take steps to accurately report the emissions within your control.

Book a call with us to see how 15Rock can help with carbon accounting and how easy it is to measure, reduce, offset, report, and certify all of your emissions in our easy-to-use platform.

Keywords: Carbon Offsets, Climate change, ESG, CO2 emissions, Reputable offset providers, Verification issues, Transparency, Best practices.

Recommended reading

If you want to learn more about scope reporting and carbon disclosures, check out our free resources:

• Article: What Are Carbon Offsets and How Do They Work?
• Article: The AI Chatbot Empowering Investment Research Analysts for Climate-conscious Decision-making
• Article: List of Most Important ESG-Related Terms
• Article: Aligning Capital with Climate Solutions: A Comprehensive Guide for Investors
• Article: The Intersection of Climate Finance and Gender Equality

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Feature Image Credit: Photo by NOAA on Unsplash