We are sure you have heard of the buzzword ESG. Short for Environmental, Social, and Governance, ESG arose from demand from customers, employees, and investors for companies to step up against the climate crisis, social injustices, public health concerns, and other issues we are facing as a society. Rather than just chasing for financial gains, stakeholders ask companies to be socially purposeful and make positive contributions to societies.
ESG is a way to evaluate companies based on the three aspects: Environmental, Social, and Governance. These principles are used to guide decision-making and processes in the company. While the components of each aspect is variable, the following is usually captured:
- “E (Environmental)” can include greenhouse gas emissions, climate change, pollution, waste management, and energy efficiency.
- “S (Social)” can include human rights, labour standards, product quality, community involvement, and data security.
- “G (Governance)” covers the governing of the “E” and “S” aspects, which can include board composition and structure, strategic oversight and compliance, and executive compensation.
Companies will disclose their ESG reports to the public regularly. Some people might use the ESG reports to gauge whether they want to invest in such companies. With sustainability and impact in mind, some call this sustainability, green, impact, or responsible investment.
As great as ESG sounds, it is important to not fall into the “sins” of ESG management. It is crucial not to focus too much on ratings and overlook the real impact ESG tries to achieve. ESG should not be treated as a means to an end (e.g., good reputation, recognition). Rather than using ESG as a “greenwashing” tool, an ESG strategy should be followed with impactful and significant actions. Another manifestation of tokenism is an ESG agenda that disconnects from the business’ strategy, which risks the ESG efforts being fragmented and empty.
What are some trends of ESG in 2021 globally? The sustainable finance market is expanding. For example, the market for green bonds has grown. There is also activism around companies’ ESG plans. In particular, activists requested companies to disclose race and gender diversity figures, and pushed companies to take greater action to meet the Paris Climate Goals. Concerns on data and tech are also growing as those sectors grow. For instance, there are discussions around the environmental impacts of cryptocurrencies.
What do you think about ESG? Do you think it’s useful, or do you think companies exploit it for public relations? Let us know your thoughts in our upcoming events!