A sustainable future has become a pressing concern around the world. It is becoming increasingly important for businesses to focus even more on sustainability while maintaining ethical behaviour and giving back to the communities in which they operate.
Over the past few years, there has been significant growth in ESG investments around the world as more and more organizations increasingly realize the interdependence between social, environmental, and economic issues and consider these issues in their decision-making.This has become something that stakeholders demand, and investors expect.
ESG is becoming one of those acronyms that everyone knows, but not everyone understands. In this article, we want to provide you with answers to common questions you might have about what ESG is, how ESG creates value, or why ESG is important.
1. What is ESG – Introduction to ESG
Let’s start with the basics and explain whatESG means. To put it simply, ESG criteria encompass three types of factors: environmental, social, and governance. In the world of 'socially responsible investing', ESG refers to business management/performance in three dimensions.
Among those criteria, are:
· E – Environmental: it represents a company’s environmental impact
· S – Social:this area is all about the people and the reputation of the company
· G – Governance: the G area is all about how a company is managed
ESG enables organizations to determine the contributions they have made to sustainability and ethical practices on a basis that provides transparency to the market, financial benefits to the organization, and industry benchmarking.
You might have been wondering where does the ESG term come from? An Interesting fact is that ESG was first mentioned inOctober 2005 by the United Nations Environment Programme Initiative in the Freshfields Report.
As shown in Table 1, ESG is an implementation of the Sustainable Development Goals (SDG) outlined in the 2030 Agenda for Sustainable Development, which contains 17 SDGs in the following categories.
2. What does the “E” in ESG stand for?
The environment is one of the most important things we need to protect if we want to continue to live and grow on this planet. A company’s operations and processes play a key role in whether it is environmentally responsible and socially-friendly and embodied sustainability(ESG), and can bring significant value to shareholders, investors, and customers.
In fact, ESG issues encompass a range of topics that apply to all industries and organizations in one way or another. The following are some of the most significant “E” factors:
· Climate change
· Greenhouse gas emission
· Water and waste management
· Land degradation
· Circular economy
3. What does the “S” in ESG stand for?
The 'S' in ESG refers to a company's interaction with its employees as well as the social and political environment in which it works. The Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI), for example, have developed on existing frameworks addressing social concerns in ESG.
They consider the following social parameters:
• Human rights
• Consumer protection
• Equality, diversity, and inclusion
• Working conditions
• Data security and digital rights
• Health and well-being
• Access to union or works council
• Community engagement
4. What does the “G” in ESG stand for?
Understanding governance risks and opportunities are what the 'G' in ESG stands for. Good data is required for effective corporate governance and that’s where smart technology can provide businesses access to data on a wide range of topics.
The following are some factors to consider:
• Business ethics
• Bribery and corruption
• Risk management
• Accounting and taxes
• Board diversity/independence
5. What is the Difference Between CSR and ESG?
In short, Corporate Social Responsibility (CSR), refers to an organization's efforts to positively impact its employees, consumers, the environment, and wider community. Almost every large company reports on this annually, as it is a form of self-regulatory.
Are ESG and CSR the same? ESG and CSR are related but not the same. The ESG metric measures the above-mentioned activities to develop a more precise picture of how the company is doing.
As part of CSR, the business strives to create accountability within the organization itself. With ESG, you can measure the accountability that exists already.
Taking a look at CSR in terms of corporate responsibility gives context to sustainability agendas and corporate responsibility culture. Action and measurable outcomes are part of ESG.
Essentially, good CSR initiatives may lead to high ESG ratings. A strong CSR strategy combined with a good ESG rating would be ideal. Simplifying, CSR is seen as the qualitative side while ESG is a quantitative one.
6. How ESG is measured? – The Value of Data
Strong ESG programs focus on more than just good intentions and marketing campaigns. Instead, they emphasize data collection, analysis, and reporting. It's not enough to make aspirational statements about ESG efforts, they have to be quantitative, measurable, and strategic.
So you might have a question – how ESG is measured? An initiative to define common metrics for ESG reporting was started by the International Business Council (IBC), within the World Economic Forum. This project aimed to ensure that businesses have a clear and consistent method of measuring their ESG initiatives, and that they provide value to stakeholders along the entire value chain. IBC developed a set of 21 core metrics and a set of 34 expanded stakeholder capitalism metrics. The recommended metrics are organized under four pillars: Principles of Governance, Planet, People, and Prosperity.
7. How ESG is Reported?
It is up to the company to choose the reporting format that is most appropriate to their needs, as long as it meets the legal requirements. Here are some examples of possible reporting formats:
• Annual report
• Stand-alone sustainability report that covers only sustainability information
• Integrated report which gathers both financial and sustainability information in one document
In addition to meeting internationally recognized reporting standards, ESG information should also be disclosed in accordance with the soon to be proposed EU standards, which serve as important points of reference. The most commonly used international reporting frameworks are:
• GRI (all companies)
• IIRC (public companies)
• SASB (public companies in the US)
8. How ESG creates value?
Are you wondering why ESG is important? Here are some of the key values of ESG:
• More accurate and quality data – By engaging in ESGs, a company can provide shareholders and stakeholders with accurate, quality information.
• Business strategy and governance strengthening – Many investors believe an effective ESG strategy will lead to competent and efficient governance.
• Improved efficiency & cost saving – ESG enables your company to minimize its operating costs and environmental footprint.
• Streamlined risk management – For example, companies that implemented ESG practices during the pandemic performed better financially. Those companies who adapted and managed the pandemic using ESG strategies now have structures and systems in place that will help them cope with future risks, such as climate change.
• Alignment with ESG investors’ expectations and values – Investors may be attracted by transparent performance reports or dialogues addressing ESG priorities.
• Increased employee productivity – It can be increased with programs, for example, mental health support, paid sick leave, and charity donations. These programs can increase employee satisfaction and promote positive outcomes on an environmental, social, and financial level.
9. ESG and PropTech
PropTech plays an important role when it comes to all ESG aspects. It is said that ESG will become a primary driver of technology for real estate adoption in the future years. We're witnessing how smart technology can help with ESG data gathering and reporting, as well as overall ESG performance across the board.
It goes without saying that PropTech may be beneficial when it comes to enhancing building energy efficiency. The same goes regarding social aspects streamlining, for example, employee health, productivity, and well-being. Collecting high-quality data is one of the most difficult aspects of ESG reporting. Technology and software solutions for real estate tackles this problem by providing a cost-effective method to gather, aggregate, and present data.
Both PropTech and ESG are inextricably linked, and both will continue to expand in importance for investors and businesses alike. Read more about how can PropTech help with the Environmental, Social, and Governance aspects.
10. Final Thoughts
It’s no secret that the world is realizing that we, as humans, must find a way to sustain ourselves and preserve our environment. We’ve already seen this through widespread support for “green” and “sustainable” practices in both business and even government policies.
These days having the ESG strategy has become increasingly essential. Environmental, social, and governance issues are now attracting as much attention as financial factors like revenue and earnings. This is not surprising as what happens to the earth and society affects us all – it’s an unassailable fact that we’re all connected.