ESG: Environmental, Social, Governance
What is ESG criteria?
ESG stands for Environmental, Social, and Governance. ESG is a set of metrics that can evaluate a company’s compliance and performance with regards to environmental and social factors, and that company’s ability to generate positive, measurable impact.
Traditionally, investors would rely on financial data to determine the suitability of a company for investment. Today however, ESG metrics are also being used to assess the responsible values of an organization, its long-term prospects, and investment viability. These criteria relate to sustainability, community, and the responsible administration of the organization.
While ESG concerns have been around for decades, COVID has put the spotlight firmly on ESG in the last two years, bringing inequality to the forefront alongside a growing global consciousness.
ESG vs Sustainability
ESG and sustainability are related concepts, but they differ in their focus and scope. ESG, which stands for Environmental, Social, and Governance, refers to the criteria that investors use to evaluate companies' ethical and sustainability practices. ESG takes into account a company's environmental impact, social responsibility, and corporate governance practices.
Sustainability, on the other hand, refers to the ability to meet the needs of the present without compromising the ability of future generations to meet their own needs. Sustainability encompasses a broader range of issues, including environmental, social, and economic factors. While ESG focuses on the practices of companies, sustainability looks at the impact of these practices on the planet and society as a whole.
ESG vs CSR
CSR stands for Corporate Social Responsibility. The main difference with ESG is that CSR, which began to appear in the early 2000s, is more of a general philanthropic program of initiatives by a company in response to whatever social issues it has chosen. ESG, on the other hand, benchmarks against specific and independent metrics.
Breaking down ESG metrics
How important is ESG for companies?
ESG has become extremely important for companies today. Macro factors, such as climate risk, increased regulatory pressures, and data security concerns, represent very real risks for investors, as well as the economic difficulties Covid-19 has caused. Today, companies must deal with a range of complex environmental, social and governance responsibilities, as well as greater scrutiny from stakeholders and the general public.
Whatever is important to investors is important to companies. With more and more millennial investors in the market, organizations are now seeing a direct correlation between their sustainability proposition and their bottom line.
What is the Corporate Sustainability Reporting Directive (CSRD)?
New sustainability reporting requirements, like the EU’s Corporate Sustainability Reporting Directive (CSRD), mandate ‘double materiality’. Double materiality requires businesses to disclose both how sustainability issues impact their business and how their business impacts people and the environment. The concept of double materiality recognizes that the term materiality has historically been linked to impacts on the organization itself, and not the organization’s external impact. By disclosing both types of impacts, businesses can deliver a more comprehensive picture of their sustainability performance.
ESG and the Board
The Board is held accountable for ESG. However, it’s also becoming more common to see full-time roles for ESG strategists within enterprises, as well as a Chief Sustainability Officer, who takes responsibility for overseeing ESG initiatives and reporting.
As far as the Board is concerned, the primary step is to recognize the importance of ESG and motivate the C-suite if necessary to include it in company strategy. The Board must contain within it the requisite expertise for ESG accountability and monitoring. If this isn’t the case, board members should seek to upskill themselves in this area.
Most importantly, the Board must be capable of leading conversations and asking probing questions in relation to ESG, in its primary function as communication between management and investors.
How to prepare a three-step foundational ESG framework
1. Assess your current ESG performance
Use Ansarada's ESG Pulse Check, a quick self-assessment delivering a gap analysis report with benchmarking to ESG leaders. It creates clarity and alignment on your current state's strengths and opportunities. It's free and takes only 10 minutes to complete - see your rankings and results instantly.
2. Identify and prioritize your most pressing ESG issues
Use Ansarada's ESG Materiality Assessment to efficiently diagnose the most important ESG issues from the view of internal and external stakeholders. The resulting report provides essential information for setting an ESG strategy, demonstrating commitment, building trust, increasing credibility, and creating focus and confidence on next steps.
Take the ESG Materiality Assessment
3. Develop your ESG Strategic Action Plan
Turn your assessment foundations into a cohesive strategic plan, creating a comprehensive one that achieves impact, measures progress, and communicates critical ESG issues with ease. Aligned with relevant UN SDGs, this plan includes workflow tools for assigning tasks and automating progress tracking.
