We have been hearing more and more about ESG in our meeting rooms, webinars, and blogs. So we decided to talk a bit about this rising topic in our community.
Investing in social causes is gaining more and more ground, and ESG emerged with the purpose of guiding companies on how to meet this growing demand for a sustainable organization.
ESG, or environmental, social, and governance investing, uses specific criteria to classify investments, making it clearer what deserves attention when it comes to sustainability.
What is ESG?
The acronym ESG stands for Environmental, Social and Governance.
More and more investors are using this non-financial factor as part of their investment analyses. With growing concern about the status of companies, these factors have become important metrics for decision making when investing.
Likewise, they have proven to be aspects that contribute to organizational growth. That is why they are so vital! Let's take a closer look at each of these aspects.
Environmental
The E, for Environmental, concerns the preservation of natural resources and the company's analysis and use of renewable energy sources — whether there is a waste management program, for example. It also looks at how the company handles potential air or water pollution problems arising from its operations.
Another important environmental factor is analyzing, where applicable, deforestation issues and the organization's attitude toward climate change. When there is a supply of raw materials, it means assessing, for example, the origin of the raw materials offered by partner suppliers.
In other words, here we deal directly with factors related to the environment and the health of the planet.
Social
The S, for Social, is the factor that analyzes how the company treats people, both inside and outside the organization. It considers aspects related to employee relations and diversity, as well as working conditions, including child labor and slavery.
The social factor also looks at local communities, seeking to fund projects or institutions that will serve poor and underserved communities. It is also important to ensure employee health and safety and to use fair labor practices.
Governance
The G, for Governance, considers how the organization is managed. What are the rules and principles that define rights and responsibilities? Does the company care about anti-bribery issues? Diversity is also analyzed here, but in the sense of having a diverse executive committee.
Many investors also look at executive compensation — whether the company, for example, has frozen employee salaries while favoring bonuses for executives.
One way to add value is to tie employee interests and customer satisfaction to executive bonuses. That way, we can create real, more complete progression within the company.
Origin of the term
It may seem that ESG is just a hot topic in recent discussions. In fact, however, it gained momentum in 2004, when former UN Secretary-General Kofi Annan brought together about 50 CEOs of financial institutions to discuss ESG. The secretary's goal was to find ways to integrate ESG topics into the capital markets.
As a result of that meeting, a report was published in 2005 under the title Who Cares Wins.
The report argued that addressing environmental, social, and governance factors in capital market analysis would increase concern about the subject. This focus on ESG would be good for the market and would steer it toward more sustainable organizations — bringing better results for society as a whole.
ESG and investments
Today, many investors recognize that ESG provides important information about an organization. It makes it possible to understand corporate purpose, strategy, and also the quality of a company's management.
B3, Brazil's official stock exchange, has also established a methodology and analyzes companies, evaluating their score across ESG themes. One well-known index covers carbon emissions, for example; companies that measure this aspect join the basket of investments that have embraced ESG.
Advantages of adopting ESG
When the organization looks at all these aspects (environmental, social, and governance), it creates longevity for the organization and fosters company sustainability.
By analyzing these ESG factors, the company thinks about the future and can even build risk management around the topic. When risks are managed, investors can better analyze whom to invest in, and the company grows.
The company can also achieve profitability since, by improving business efficiency, it will see lower operating costs and productivity gains. This can improve employee engagement, reducing staff turnover. It also lowers the chances of environmental accidents and, as a consequence, the costs of mitigating such problems.
Another advantage is the impact on the company's image. Today, people are giving more weight to the principles an organization stands for — topics such as cruelty-free products, for example, are gaining ground in discussions.
So, by caring about the environment, the social sphere, and governance, the organization will have a differentiator to promote.
A rising topic
Perhaps it is not yet very clear to every company how to invest in ESG, how to encourage this discussion, and how to create practices focused on the development and sustainability surrounding the environmental, social, and governance pillars. However, it is a growing topic that keeps gaining strength and bringing many improvements to society as a whole.
That is why it is important for organizations to start preparing now to look at our natural resources, at people, and at their strategies differently. This new outlook will bring more sustainability to the organization and to the society around it, creating a stronger market and, in doing so, improving the world! So, how about starting to think about ESG at your company?
Originally published in Portuguese at useall.com.br.