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News analysis


WHAT IS ESG AND WHY IS IT IMPORTANT?

by Stephen Conmy



If you sit on the management team or board of a company you will probably have
heard of the term, so what is ESG and why does it matter?

Environmental, social and governance (ESG) is a set of standards for how a
company operates in regard to the planet and its people.

ESG is important because socially conscious investors now use ESG criteria to
screen potential investments.

Environmental criteria examine how a company performs as a steward of the
planet. Social criteria examine how a company manages relationships with
employees, suppliers, customers, and the communities where it operates.
Governance defines a set of rules and best practices, along with a series of
processes that determine how an organisation is managed and controlled.




ENVIRONMENTAL CRITERIA

Environmental criteria may include a company’s energy use, the waste and
pollution it creates, how it conserves natural resources, and the way it treats
animals.

The criteria are often used in evaluating any environmental risks a company may
face and how the company is managing those risks. For example, does it own
contaminated land? How does it dispose of hazardous waste? How does it manage
toxic emissions, and how does it comply with environmental regulations?


SOCIAL CRITERIA

Social criteria examine the company’s business relationships. Does the company
have a high regard for employee health and safety? Does the company allocate a
percentage of its profits to its local community? Do company employees engage in
volunteer work? Are other stakeholders’ interests taken into account?


GOVERNANCE

Investors looking at a company’s ESG will want to see that it is accurate and
transparent in its accounting and reporting methods. Investors will also look at
how a company treats its shareholders and their right to vote on important
issues. Investors will seek assurances that the company doesn’t engage in
illegal practices and avoids conflicts of interest when it chooses its board
members.


LACK OF ESG CAN HURT A COMPANY’S VALUE

Investors now understand that environmental, social, and governance criteria go
beyond ethical concerns. With robust ESG criteria, companies can avoid practices
that involve risk. For example, Volkswagen’s emissions scandal rocked the
company’s share price, and investors lost billions.

Investors and investment firms look for ESG-minded companies and financial
services companies like Goldman Sachs and JPMorgan Chase now publish annual
reports that review the ESG approaches of various companies.


ESG RATING AGENCIES

There are approximately 30 notable ESG rating agencies and data providers around
the world.

The following ESG rating agencies cover global large-cap firms and are the most
used by asset managers and investors.

 * RobecoSAM Total Sustainability Rank – ranks companies against industry peers
   across E, S and G metrics.

 * ISS Governance Quality Score – Identifies corporate governance risks based on
   board structure, shareholder rights, remuneration and audit.

 * CPD – measures the level of commitment to climate change mitigation,
   adaptation and transparency.

Although ESG ratings are not perfect, they serve a vital role in providing a
snapshot of a company’s performance to support more sustainable investment
decisions.


DIPLOMA IN ESG

As a leader in ESG, you need to anticipate investors’ questions before they are
asked, manage the associated risks and implement an appropriate ESG framework.


Learn more


DIPLOMA IN ESG

As a leader in ESG, you need to anticipate investors’ questions before they are
asked, manage the associated risks and implement an appropriate ESG framework.

Learn more


Tags
EnvironmentESGImportanceSocial Criteria

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