The Global economy has stalled, industry and countries are hit at differing levels, and the governments around the world talk of a new normal. I won’t profess to be able to suggest what that looks like, nor who will be best and least effected. What I will touch on is the subject of ESG and its growing importance in how companies operate, and financiers base their decisions; that will certainly impact us all, and as business directly able to positively impact ESG, I wanted to discuss it, and pose a thought process.
So, what is ESG criteria?
Environmental, social and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
In short, could we describe it as a framework to formalise one’s moral compass?
Environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks. For example, are there issues related to its ownership of contaminated land, its disposal of hazardous waste, its management of toxic emissions, or its compliance with government environmental regulations?
Social criteria look at the company’s business relationships. Does it work with suppliers who hold the same values as it claims to hold? Does the company donate a percentage of its profits to the local community, or encourage employees to perform volunteer work there? Do the company’s working conditions show high regard for its employees’ health and safety? Are other stakeholders’ interests taken into account?
With regard to governance, investors may want to know that a company uses accurate and transparent accounting methods and that stockholders are given an opportunity to vote on important issues. They may also want assurances that companies avoid conflicts of interest in their choice of board members; don’t use political contributions to obtain unduly favourable treatment; and of course don’t engage in illegal practices.
There’s good reason for investors to put this emphasis on ESG questions.
Companies with risk management practices that take into consideration broader industry, regulatory and societal risks, are more likely to drive long-term sustainable performance—and shareholder value. For both the corporate and investment world, a failure to discuss ESG risks can be dangerous. Extreme climate events could impact operations; a cyber breach might threaten data; a lawsuit over gender discrimination, or product quality could impact the brand and the bottom line. If such risks become reality, both corporates and their investors would suffer. Investors are increasingly sending strong signals that they are focused on ESG risks, but many corporates still have sustainability teams working in isolation. As a result, investor relations and finance, as well as the C-suite, often fail to integrate sustainability risks into their long-term strategy discussions with investors. The gap persists, but solutions exist. If investors send a crisp and consistent message—and clarify the value at stake for companies—they’re more likely to get companies to respond. With such pressure from investors, corporates will embed ESG factors into their overall strategy and risk oversight discussions. They’ll be better able to present their risk-mitigation and value creation story – including the growth potential from identifying and managing ESG issues and shape the narrative around their brand and practices.
Both sides stand to gain, so It’s time to bring perspectives together to build a future with better management and sustainable value creation for all stakeholders.
Footprint Zero can be integral to your ESG dialogue and improving your Environmental criteria, which in turn improves your overall ESG appeal to investors.