It was once universally understood that institutional investors’ main objective, and the investee company’s main obligation, was to maximise short term returns for shareholders, without regard for other factors like social and environmental impacts.
Now, with the rise of the ‘responsible investment’ movement, consideration of ESG is seen increasingly as part of a shareholder’s fiduciary duty, in both the US and EU markets. Forbes
What are ESG criteria?
ESG (Environmental, Social and Governance) criteria are used by socially-conscious investors and shareholders to screen investments and assess a company’s impact on the world. They affect how your company will gather and retain funding from investment funds who have a ’socially responsible’ investment strategy.
ESG can also relate to:
- ESG reporting — the data disclosed relating to ESG criteria e.g. 300T GHG emitted in 2018
- ESG performance — how companies are performing in ESG domains
- An ESG score/rating — an assessment by a third-party organisation of ESG performance
ESG: the journey, not the destination
If we think of the market as a formula one race, with profit representing how fast our car goes, then our ESG performance is how we conduct ourselves on the race track and what kind of car we’re driving.
To impress this segment of socially conscious investors, it’s necessary to maintain a high ESG rating by looking at how you’re conducting your business operations, not just how much money you’re making.
The ‘3 pillars’: Environmental, Social, Governance
ESG criteria are separated into 3 main categories, or ‘pillars’: Environmental, Social and Governance.
Investopedia defines ESG criteria as the following:
Environmental criteria consider how a company performs as a steward of nature. This includes:
- Action on climate change
- Greenhouse gas emissions and reductions
- Water usage
Social criteria examine how it manages relationships with employees, suppliers, customers and the communities where it operates. Themes include:
- Labour standards
- Health and safety performance
- The way a company treats clients and customers
- Anti-corruption measures
- Tax transparency
- How are decisions made across the executive board?
Why is ESG important?
There are a number of financial benefits that correlate to companies that pursue a high ESG performance:
- More attractive to investors. Green investment funds and socially responsible investors are more likely to fund companies with good ESG scores.
- Better performance. A study by leading asset manager Amundi, showed that between 2014–2017, its portfolios with high ESG scores outperformed competing investments. Source
- Better financial indicators. MSCI reports that high-ESG companies experience lower cost of capital, less volatile earnings and lower market risk compared to low-ESG companies (MSCI)
Additionally, KPMG reports some examples of long term benefits created by ESG activities. Source
- Adaptability. Evolving business models minimise the impact of disruption from technology or regulation.
- Prepared for Regulation. The adoption of or investment in renewable energy infrastructure and technology to reduce carbon emissions and costs arising from environmental tax or payments for offsetting carbon emissions.
- Innovation. Technological advancements in fostering a sharing economy that promotes innovation and improves efficiency.
- Positive brand image. Companies with high ESG values may experience better retention rates and a more positive brand recognition amongst their staff and customers
How can CarbonClick help?
Climate change has run-on effects on every sector of society and on every ESG theme, from the environment (disasters, resources scarcity), social (justice issues, inequality, refugees) and business governance (decision making regarding risks, insurability, stranded assets, volatility in markets).
Doesn’t sound good, does it? Luckily there is something your business can do.
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Our simple technology integrates with your existing eCommerce systems and we completely manage the offset programmes, leaving you time focus on running your business.
Earning social license to operate and reducing your environmental burden is made easy with CarbonClick