Environmental, Social and Governance – ESG – was first mentioned in the 2006 United Nation’s Principles for Responsible Investment (PRI). As a regulatory framework, ESG intends to ensure that the long-term interests employees and society at large, are integrated into a company’s mission and objectives. The ESG framework is made up of three major pillars – or themes – that interlink to support high levels of sustainability; the environment, human rights, and corporate governance issues. This includes specific challenges such as climate change and inequality, while also identifying opportunities to demonstrate social progress and create shared value.
As society continues to recognize it needs to manage the risks associated with their own priorities and values, it has begun to demand increasing levels of disclosure of corporate practices on environment, social and governance responsibility.
The Environmental Pillar
This pillar is arguably the most complex of the three and focuses on the impact business has on climate change. An organisation will fall under this pillar when it reports on its greenhouse gas emissions and environmental impact and will be required to proactively set goals for reducing its environmental footprint. Renewable energy strategies are also reported under this pillar as this has been identified as a major factor in mitigating climate change. This pillar requires high levels of environmental stewardship and contains specific measures toward minimizing human health risks, often associated with pollution and chemicals in the workplace, building materials, and other sources of exposure. Under this pillar, companies may also report on the positive impact they have had on their environment and surrounding communities—such as energy conservation measures or waste reduction efforts that benefit the community at large rather than just shareholders.
The Social Pillar:
This pillar covers the social risks management practices may have in the selected segments of a company’s existing business activities, products, and services. This pillar covers an increasing number of dimensions; including employee development and labour practices, product liabilities regarding safety, quality and environmental aspects, supply chain labour conditions as well as health and safety standards. Furthermore, it details specific requirements for controversial sourcing issues, including conflict minerals, as well as access to goods and services for vulnerable groups.
The Governance Pillar:
This pillar lays out specific standards for the financial, legal, and social systems that determine a company’s accountability, performance, and strategy. The fundamental issues which require compliance under this pillar are shareholders rights, board diversity, how executives are compensated and how their compensation is aligned with the company’s sustainability performance. It also includes matters of corporate behaviour such as anti-competitive practices and corruption.
Not all companies face the same journey to ESG compliance, nor will all approaches be the same. One of the defining characteristics of ESG is its focus on materiality. Materiality is a measure of the significance or impact of an issue and is used by investors, lenders and other stakeholders to determine how a company should manage issues that may affect its bottom line. Appropriate materiality analysis identifies areas where larger financial investments are needed to address environmental or social issues, or areas where less support is needed due to low impact. Companies report on what they consider to be financially material issues, but increasingly double materiality (meaning alongside financially material issues, socially issues are also treated as material) is being recognised as an important concept in choosing what is considered material by a company.
ESG has already made a dramatic impact on the way company leadership make business decisions. The ESG community, now actively involved in measuring, managing, and reporting on how companies integrate environmental and social factors into their operations, is growing and will continue to grow dramatically. Companies are realizing that ESG issues have the most direct impact on business success. Without an implemented policy that is commonly understood, administered across the organization, and consistently monitored, companies risk getting lost in the masses.
To find out more about how your business can place innovation and real business outcomes at the heart of ESG compliance, reach out to us.