ESG stands for environment, social, and governance, a set of criteria used by investors, executive boards, managers, and other stakeholders to evaluate the sustainability, corporate responsibility, and risk profile of a business.
ESG is also described as environmental, social, and governance - same thing, slightly different acronym.
ESG analyzes three themes or categories:
Companies publish annual ESG reports about their data and performance, and investors read and analyze these reports to evaluate the benefits of risks of making investments. While ESG reports and ratings often group environmental, social, and governance information together, each of the three sections measure their own distinct things:
Environmental ESG activities, issues, risks, opportunities, and disclosure topics include:
This ESG category is similar to our basic definition of corporate environmental sustainability — balancing the environment, equity, and economy across products, packaging, facilities, energy usage, consumption, and waste in an effort to reduce global warming, climate change, and biodiversity loss through an investment and corporate decision-making lens.
Social ESG activities, issues, risks, opportunities, and disclosure topics include:
Internally, this ESG category is closely connected to a company's HR (human resources) and CSR (corporate social responsibility) policies, programs, and practices. It also related to human rights, economic development, and community impact.
Governance ESG activities, issues, risks, opportunities, and disclosure topics include:
As well as other aspects that balance the rights, responsibilities, and structure of various shareholders and stakeholders in the company.
The short answer is because investors and governments ask them to. However, many companies that aren't required to report their ESG performance still do it voluntarily as a sign of good corporate citizenship and transparency. By publishing ESG reports, companies can show how their performance compares to peers, demonstrate industry leadership, improve their reputation and investor standing, and promote accountability around their ESG efforts.
To learn more about ESG reporting, please read our in-depth guide here.
As you've already learned, ESG is quite broad, spanning a variety of different topics and responsibilities throughout the economy. So let's walk through some real-world examples of ESG work:
There are quite a few different ESG-related jobs. In fact, we'd argue most jobs have something to do with environmental, social, or governance. That includes:
1. ESG Analyst or Investment Researcher
2. Sustainability or ESG Consultant
3. Corporate Sustainability or ESG Reporting Manager
4. Environmental Engineer or Scientist
5. DEI or HR Manager
6. Social Impact Manager
7. Legal, Governance, or Compliance Officer
As well as many others, including boards, CEOs, CFOs.
Many different business sectors and segments of the economy play an important role in ESG. Most also have their own, industry-specific ESG priorities, topics, and risks. Examples includes
While ESG focuses on "non-financial" indicators compared to classic investor metrics like profit and earnings-per-share, ESG issues can directly impact a company's finances, costs, and long-term competitive standing. For example, when a company like Amazon is investigated for its labor practices or criticized for the environmental impacts of its packaging and shipping practices, these risks can impact its stock price and profitability.
ESG criteria give investors and decision-makers a complete lens to evaluate a business' strategy, operations, opportunities, and risks, by accounting for how its business interacts with and impacts its employees, partners, the environment, and society.
One helpful way to view ESG is the social externality side of financial accounting. In modern history, companies operate, account for their financial performance, and then issue shareholder reports like a 10-K which investors use to decide if they want to invest in the company or not. The problem with this narrow approach however — as we've recently seen with companies like Exxon Mobil, JPMorgan Chase, Wells Fargo, Twitter, and Tesla — is that financial accounting alone doesn’t fully account for the consequences and risks of operating a company, particularly long-term:
These are the types of questions and risks ESG attempts to understand and address.
Due to a variety of economic, social, scientific, and political factors, support for responsible, stakeholder capitalism and assessing the long-term role of companies in society has grown considerably over the past decade. The impact of the COVID-19 pandemic, climate change, Black Lives Matter, wealth inequality, government gridlock, and regulatory uncertainty have increased the need for companies to proactively integrate ESG issues and risk management into their strategy, policies, business model, company culture, and sourcing.
Compared to quarterly earnings cycles and short-term decision-making, ESG is a longer-term lens on risks, opportunities, and value creation. But ESG also carries near-term, immediate consequences, particularly for companies who fail to consider and address material ESG considerations.
Some of the most important (and common) ESG risks for companies and investors include:
In many ways, ESG performance has become a major indicator of responsible leadership, brand reputation, and risk management. A well-run company that cares about its people, customers, and the environment will logically be more resilient over time and outperform its peers who don't.
Currently, companies around the world are navigating a landscape of different rules and requirements when it comes ESG reporting. The U.S. Securities and Exchange Commission (SEC) has been advising publicly traded companies to disclose climate-related matters that are financially significant, but still haven't been comprehensive regulations in place. However, other regulatory bodies worldwide are now introducing or finalizing ESG reporting requirements and regulations, including Australia, Canada, the European Union (EU), India, Singapore, the United Arab Emirates (UAE), and the United Kingdom.
2023 continues to be an eventful and turbulent year. Much like the news cycle itself, ESG issues also trend in terms of global and stakeholder attention and prioritization. While every company's ESG materiality is unique, here are some of the most important ESG issues leaders, boards, and investors need to keep in mind in 2022:
Within ESG, it's critical for leaders to keep up with - if not anticipate - these trends, while also creating flexible structures, technology, and operating principles to adapt to new and emerging ESG issues.
Today, ESG continues to be an important and growing topic across the global economy. While ESG may feel complicated, dozens of case studies demonstrate that strong, thoughtful, and strategic ESG performance is a competitive business advantage that delivers positive ROI. Many companies start ESG work due to compliance and investor reporting pressures, only to find that as their ESG investments, maturity, and capabilities evolve, their company realizes significant cross-company benefits and efficiencies.
Every company's ESG roadmap is different - and ESG truly is a long-term, strategic journey for boards and management teams. Nonetheless, the benefits of strong ESG performance on brand reputation, employee talent attraction and retention, culture, operational efficiency, risk management, and access to capital are not only numerous - many are quantifiable. And, as always, if we can help your organization improve your ESG strategy, data managementm or unlock more ESG ROI, please be in touch.