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What is ESG: beyond environmental, social, and corporate governance

Environmental, social, and corporate governance (ESG) is an approach to assessing the extent to which a corporation works towards social objectives beyond a corporation’s role to maximize profits on behalf of the corporation’s shareholders.

The acronym ESG first appeared in a 2005 report (United Nations) entitled “ Who Cares Wins.” At the time, 20 financial institutions from nine countries met to develop projects and recommendations on environmental, social, and governance issues in asset management, securities brokerage services, and related research.

The report concluded that including these factors and promoting discussions on the subject in the financial market generated more sustainable calls and better results for society.

Why has the term become so popular?

One of the main reasons is that, more and more, companies have discovered that adopting measures of care for the environment, social responsibility, and best governance practices are, in fact, factors that help in the development of the organization.

In addition to the economic-financial aspect, the future of the planet and society, the topic has everything to do with investments, as it is related to the expectation of a positive lot, and the realization of a project or achievement since companies with good ESG practices are less at risk of being penalized for environmental impacts.

From the consumer’s point of view, this reality is even more robust, and the public already encourages and prioritizes companies dedicated to socio-environmental issues. For example, a recent survey by the Nielsen consultancy in 60 countries revealed that 66% of people are willing to pay more for products and services from companies committed to these issues.

Explaining each letter of the acronym

  • Environmental: summarizes how the company acts in the management of nature. It refers to how the company uses its natural resources, contributes to climate change, and uses its energy.
  • Social: examines the company’s relationship with its employees, suppliers, and the community where it operates, including aspects of inclusion and diversity and whether all those involved are engaged.
  • Governance: concerns the concern with the remuneration policy of its executives and if the company has transparency and respects the codes of conduct and ethics.

Strategic importance of adopting the ESG for companies

Profitability: as this topic demands a well-adjusted financial control, adopting better business efficiency benefits the company as it reduces operating costs and productivity gains, corroborating with employees’ engagement, reducing turnover rates, and, finally, generating savings.

Managing the company image: by adopting ESG, the company ends up having greater prominence in the financial market, as it generates value for investors, who prefer to allocate their capital to companies that are concerned with the environmental issue and have a sustainability policy.

Risk reduction: here, we mention the legal and regulatory risk because companies that adopt ESG drastically reduce the risk with fines for damage caused to the environment, generating more value for the company to invest in its own business.

Avoiding Greenwashing

Unfortunately, due to the great relevance of ESG nowadays, many companies try to surf this wave by disclosing suspicious and even false data and information about their commitment to sustainable actions. They try somehow to convince investors that they are indeed a company focused on environmental causes.

Faced with this serious problem, the SFDR (Sustainable Finance Disclosure Regulation) was created in Europe, which regulates transparency in the disclosure of data on ESG practices by companies, thus preventing false news from being disseminated to the market.

Who is practicing ESG

Research made by Lundquist, a corporate communications and sustainability agency from Milan, shows the main numbers of European companies members of the STOXX Europe 50 Index and how they are positioned in terms of ESG and sustainability.

Nine of the 49 companies considered qualifying as the “ leaders “ led by oil companies BP and Eni, consumer packaged goods brands Nestlé and Unilever, and healthcare firms Bayer and Roche.

Seven companies were rated “ passives to the subject “ and included ASML Holding, Lloyds Banking Group, LVMH, Prudential, Rio Tinto, Sanofi, and Safran.

Fourteen companies, including Airbus, Allianz, Anheuser-Busch InBev, Astra Zeneca, BNP Paribas, and SAP, the traditionalists, were noted as the “ most dangerous area” to be in for a company, as it “ indicates the absence of a culture of transparency and attention to the digital user.

According to the researchers, these companies focused on technical and compliance disclosure but “without demonstrating a distinct corporate identity.”

More information about ESG

Image by Artem Podrez on Pexels.

Originally published at https://angry.ventures.

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