Estimated reading time: 1-2 min.
You will regularly come across the abbreviation ESG on our website, in blogs, documents and presentations. In this short blog it is the intention to explain what this abbreviation is about and to give some explanation about the background of ESG (Environment Social Governance).
Commonly used terms in the financial services industry are: sustainable finance, green finance / lending, sustainable finance, ESG and ethical investing. Outside this service sector other terms are used such as Corporate Social Responsibility (CSR), Triple Bottom Line, Corporate Social Responsibility (CSR), Green, ESG, etc. Most of these words are used without common agreement.
ESG is the abbreviation for Environment Social Governance. Environmental, Social, and Corporate Governance refers to three central factors in measuring sustainability and social impact of an investment by a company. ESG criteria help to better determine future financial performance of companies (return and risk).
ESG issues were first mentioned in the 2006 United Nations Principles for Responsible Investment (PRI) report, comprising the Freshfield report and Who Cares Wins. Over the years, the emphasis on ESG has increased. Large institutional investors are increasingly making it clear that they expect the companies in which they invest to adhere strongly to ESG criteria. Today ESG is used in many sectors as it puts the environment, climate and social elements on the agenda in addition to economic matters.
The World Economic Forum (WEF), the International Business Council (IBC) and the Big Four (Deloitte, PwC, KPMG and Ernst & Young) are accelerating the ESG transformation through the adoption of a set of standardized metrics. Their goal is to provide companies with an organized framework to report their results in a new “stakeholder capitalism” approach. The current ESG challenge is to implement consistent and transparent reporting for financial and non-financial measures that is consistent across every industry sector.
In addition, there are initiatives, so-called frameworks such as Integrated Reporting <IR> from IIRC. This framework helps companies consider key corporate capitals (Financial, Manufactured, Intellectual, Human Capital, Social & Relationships, and Nature) in order to generate “integrated” reports. Such reports are a starting point for companies to better understand their business impact on ESG elements in order to improve them.
ESG clearly converges business elements and sustainability. This is the reason why Greenaumatic often uses the ESG abbreviation and we often use a more simplified explanation.
- E: considers how a company performs as a steward of nature
- S: examines how a company manages its relationships with employees, suppliers, customers and the community
- G: deals with how a company is governed.