What is ESG?
The acronym ESG stands for Environmental, Social and Governance. It is a set of principles that guide a company’s strategy, operations and activities and guides the assessment of its impact on the environment, customers, stakeholders and the wider society.
The concept of “ESG” emerged from an initiative led by the United Nations and key financial institutions to integrate environmental, social and corporate governance factors into the strategies and operations of companies in the financial sector. This led to the creation of the 2004 report, Who Cares Wins: Connecting Financial Markets to a Changing World which provided key guidelines and recommendations for the integration of ESG factors into businesses. ESG factors have evolved beyond the financial sector and are now applicable across all business sectors and industries. ESG metrics have become vital tools used in assessing projects and businesses for funding, for stakeholder engagement, as a determinant of social capital and by investors in making investment decisions.
- Environmental: These factors address and assess a company or an organisation’s utilisation of natural resources and its impact on the environment. They include the reduction and depletion of natural resources, habitat destruction, environmental pollution, direct impact of a company’s operations and products on the environment. Some of the impact is reflected in a company’s waste and effluents management, water conservation, climate change mitigation, reduction of carbon footprint and other environmental pollution prevention. For companies with only office type activities that could be in the service or technology industries without factory, production or manufacturing operations, the “E” pillar could address their power sources, utilisation and efficiency; use of plastics, paper and other single use items; management and disposal of electronics, batteries etc; travel policies and their overall carbon foot print management.
- Social: These are factors that affect a company or an organisation’s relationship with key stakeholders including shareholders, customers, employees, and the community. Social factors include labour practices (hiring, promotion and remuneration, employee health, safety, and wellbeing etc.), adoption of Sustainable Development Goals, data privacy, diversity, equity, and inclusion as well as corporate social responsibility initiatives and community relations. For many companies, these factors were integrated under a company’s corporate social responsibility programmes and also articulated and implemented through its corporate policies and culture framework.
- Governance: This refers to how a company or an organisation is led and managed by its shareholders, directors and officers. Governance factors include corporate governance policies and compliance frameworks, board composition and diversity, organisational policies and practices related to transparency and accountability, risk management, internal controls, stakeholder engagement and rights, anti-bribery and anti-corruption, reporting and disclosures, and its code of ethics and compliance with applicable laws and regulations.