What is ESG (Environmental, Social, and Corporate Governance)?

Environmental, social, and corporate governance (ESG) is a substantial approach that corporates across the globe are using to evaluate their overall goals beyond profit maximization. These goals advocate an ESG perspective that works towards environmental goals, social movements, and corporate governance that addresses diversity, equity, and inclusion.

As the demand for ESG is driven by consumers’ and investors’ increasing focus on future-conscious companies, governmental organizations have devised ways to measure how a specific corporation is aligned with ESG goals.

Since its inception, in less than 20 years, the ESG movement has evolved from a mere corporate social responsibility initiative that the United Nations started into a global phenomenon that represents trillions of dollars in assets under management.

Environmental concerns: The brutal reality of today is that the threat of climate change is real. Today, investors consciously choose to consider sustainability issues in their investment decisions. The environmental concerns that ESG addresses are greenhouse gas emissions, biodiversity, waste management, water management, and more.

Social concerns: The social concerns that ESG addresses are diversity, human rights, consumer protection, animal welfare, and more.

Corporate governance concerns: Corporate governance makes companies more accountable and transparent to investors and gives them the tools to respond to stakeholder concerns.

Disclosure, regulation, and reporting: As ESG data is qualitative and non-financial, the investment market has long dealt with intangibles such variables as goodwill. Thus, ESG intangibles are highly subjective and challenging to quantify and verify. With a serious lack of standards and transparent monitoring of ESG initiatives, many companies get away with greenwashing the substantive objectives. Thus, one of the significant issues in the ESG area is disclosure.

Under ESG reporting, organizations ought to present financial and non-financial data highlighting if it meets the standards set by the Sustainability Accounting Standards Board, the Global Reporting Initiative, and the Task Force on Climate-related Financial Disclosures.

Business Benefits

As investing in ESG yields tangible benefits to skyrocket a company’s performance, businesses adopt ESG strategies to experience accelerated growth in today’s market. Companies applying ESG strategies share higher market value, better investment outlook, talent attraction & retention, and customer trust. Various business benefits associated with adhering to ESG strategies are:

Conscious workforce: Purpose-driven companies have 2.8x higher retention of Gen Z talent

Engineered value: ESG strategies bring up 3% more annualized returns to companies

Technology sustenance: Companies underperform 2x by neglecting the intersection between digital technology and sustainability

Other benefits:

A purpose-driven company, not just profit-driven
Lower cost of capital
Optimistic company outlook
Reduce risks
Enjoying operational excellence
Report accurately to stakeholders
Improve processes
Transform efficiency
Reduce environmental impact
High market value through improved corporate governance

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