ESG stands for Environmental, Social, and Governance. It refers to a set of standards that organizations and investors use to evaluate a company’s governance procedures, social responsibility, and environmental effect.
Socially responsible investors, companies, and funds employ ESG standards to help them make ethical and sustainable decisions about their investments and business alliances. In addition to investors and stakeholders, this information is utilized by suppliers, customers, and employees. Strong ESG performance makes a company seem more accountable and more likely to succeed in the long run.
What Does ESG Stand For?
- Environment:
An organization’s risk management procedures and environmental impact(s) are considered environmental factors. These include greenhouse gas emissions from both direct and indirect sources, the management’s care for the environment, and the company’s general ability to withstand physical climate threats (such as flooding, fires, and climate change).
- Social:
An organization’s interactions with stakeholders are referred to as its social pillar. Human capital management (HCM) indicators, such as equitable salaries and employee engagement, are a few examples of elements that a company may be evaluated on. Another factor is the organization’s influence on the communities in which it operates.
- Governance:
The term “corporate governance” describes the direction and control of a company. ESG analysts will aim to gain a deeper understanding of how shareholder rights are seen and upheld, how leadership incentives are in line with stakeholder expectations, and what kinds of internal controls are in place to encourage accountability and transparency.
Evolution of ESG
Environmental, social, and governance, or ESG, is an evolving field that changes over time in reaction to external factors. The United States began to focus more on EHS (environment, health, and safety) in the 1980s, mainly due to the need to control pollution and raise labour standards. As the 1990s approached, management teams started to prioritize environmental initiatives over meeting legal requirements, which led to the evolution of the Corporate Sustainability movement. But there were other problems throughout this time, like “greenwashing,” which is the practice of exaggerating environmental benefits for commercial gain.
With the emergence of Corporate Social Responsibility (CSR) in the early 2000s, the focus was expanded to encompass social issue answers. Corporate donations and staff volunteerism were included in CSR, however questions were raised over the financial impact of cash gifts. The word “ESG” initially became widely known.
It was not until the late 2010s and early 2020s that the word “ESG” became widely known, although it was originally used in a UN report in 2004. With governance systems designed to maximize stakeholder well-being, ESG has grown into a wholesome framework that addresses social and environmental concerns.
What are ESG metrics & how to measure them?
The meaning of ESG metrics can be summed up as follows: ESG performance measurements measure the environmental commitments made by your business. They give you information on how you compare to other firms of a similar size and assist you in measuring the impact of your ESG initiatives in a more scientific manner.
Even while some of these measures might not directly affect your company, it’s still important to understand them because your vendors and suppliers have made ESG commitments that should be considered as part of your overall ESG ecosystem. For example, you should be aware of any environmental risk factors associated with your office provider and the manufacturer(s) of the equipment that your employees use.
Environment ESG Metrics Examples
Environment refers to everything that encompasses our planet and the natural world. This includes ecosystems and wildlife, the landscape, and the climate. In the ESG framework, the environment is analysed through the impact of human activities.
Greenhouse gases
The atmosphere of compound gases retains heat and radiation, warming the surface of the Earth. This leads to problems with the climate and environment, like the melting of the polar ice caps, which increase the frequency of natural disasters, submerge coastlines, and cause the extinction of species.
Carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), and carbon monoxide (CO) levels are a few examples of ESG measurements.
Air pollution
Other types of air pollution, apart from greenhouse gases, include particulate matter including dust, soot, soil, and smoking. This is caused by industry, construction, gasoline-powered vehicles, and wildfires. Air quality is additionally affected by sulphur dioxide emissions, which are produced when fossil fuels like coal and oil are burned. Numerous issues are brought on by air pollution, such as unbreathable air, smelly air, and lung cancer.
As an illustration Gas sensors and particle matter per aerodynamic diameter
Water Consumption
Freshwater resources are finite and need to be conserved and managed. We currently rely on fresh water supplies to keep the globe going since purifying ocean water would be too costly. Water is used on a daily basis at home and at work, as well as in numerous economic endeavors including manufacturing and agriculture.
ESG metrics examples include: volume consumed in liters or cubic meters
The Waste Output
Waste can take on various forms, such as:
- Solid garbage includes residual materials, metals, and plastics.
- Hazardous waste, including materials that are poisonous
- Sewage and other wastewater, as well as water contaminated by industry
- Nuclear activity produces radioactive waste.
- Other waste in the form of excess or inefficiently used energy and water
Waste is an issue because we lack effective methods for managing it. It is frequently thrown into rivers, lakes, and other natural areas, which leads to the extinction of species and ecosystems.
Kilograms, tons, and cubic meters are a few examples of ESG metrics.
Environmental policies
ESG reporting indicators are derived from your ESG-related policies and actions. Establishing a climate oversight board and effectively putting TCFD recommendations into practice are two examples of this. To guarantee that steps are made to reach sustainability goals, having defined policies is the first step.
ESG metrics examples include: Yes/no to having specific rules and implementations
Social ESG metrics examples
The term “social” describes the elements that surround society, localities, and people directly—the human side of ESG.
Comparative salary for living
Along with other economic problems like inflation, wealth disparity implies that many people do not receive an income that allows them to buy basic necessities for survival. Civil instability and other societal evils may result from this. This may apply to both domestic and foreign personnel. A living wage is determined by taking into account the local cost of living and paying individuals enough to enable them to do more than simply survive.
ESG metrics examples include: Average pay compared to the cost of living in the area.
Gender pay gap
On average, women make less money than men do. Individual salary disparities are also influenced by other elements, such as discrimination in the workplace and work conditions that are more favourable to men. To establish a just society and encourage everyone to reach their full potential, gender parity in remuneration is vital.
ESG metrics examples include: the difference in pay between men and women for doing the same work.
Human rights
Human rights include the things to which we generally agree that all people are entitled, such as the freedom of speech, the ability to work, and the right to a fair trial. This is important because as a civilization, we require a manner of operating that is accepted by all. Human rights are essential to preventing global catastrophe.
ESG metrics examples include: Human rights abuses and the implementation of human rights legislation
Retraining and reskilling
Two factors that are eliminating jobs are automation and globalization. It’s no longer a given to have a career for life at one business. Even skill mastery and specialization are insufficient for ensuring economic stability because these abilities could become obsolete. Employees require the resources and support to learn new skills and gain the information they need to adjust to shifting labour demands.
Examples of ESG measures include severance payments and the amount spent on training.
Governance ESG Metrics Examples
The elements pertaining to the management of businesses are included in governance. This covers strategic decision-making, executive structure, ethical issues, and the interaction between the government and business.
Pay ratio for executives
It is being questioned how much executives are paid in comparison to the typical worker. In the worst circumstances, an executive’s salary could be more than five thousand times that of an average worker. We must closely examine executive compensation in light of broader concerns about wealth inequality and the nature of value creation.
ESG metrics examples include: Executive salary in relation to the typical employee salary
Quality of governing body
ESG takes into account the qualifications and composition of the board and executive team. The governing body’s quality includes things like:
- The executive team’s other responsibilities are related to their current and former roles and affiliations.
- Executive diversity in terms of important social identities, including gender, sexual orientation, and race.
- The ESG history of each person.
The organization’s strategy and culture are ultimately determined by the governing body. When there are indications of unethical behaviour and competing interests within the leadership, mistrust and unethical behaviour may thrive.
ESG metrics examples include: The executive board’s diversity ratio and the quantity of additional commitments
Morality and anti-corruption policies
Having a shared code of ethics in addition to anti-corruption initiatives is important for all personnel inside the company, from executives to entry-level workers. Aspects of the business that are affected by ethics and corruption include customer service, financial management, and business operations. In the absence of strong ethics and anti-corruption policies, there would be no framework to recognize and address unethical activity.
ESG metrics examples include: Is it appropriate to have an anti-corruption policy?
Paid taxes
Companies frequently use systemic loopholes to legally pay as little tax as feasible. Less tax revenue implies less money going toward social services and the local economy, even while it helps the corporation develop and increases shareholder profit.
The amount of taxes paid and the tax paid relative to revenue are two examples of ESG measures.
Tips for making the most of your ESG data
As many as twenty or more ESG reporting KPIs could be necessary for you to optimize for, depending on the framework you select. Making an effective ESG strategy can be difficult, especially when you have to juggle it with other business obligations. Finding a framework that unifies strategy and execution methods may be helpful in this regard so that you can fulfil both your ESG obligations and other commercial objectives.
To sum up, ESG has emerged as a crucial framework for investors and companies alike, highlighting responsibility, sustainability, and moral behavior in the constantly changing context of environmental, social, and governance issues.
