The ESG criteria are becoming increasingly important in a company’s decision-making process. These criteria evaluate how a business handles environmental, social and corporate government issues and can have a significant impact on the company’s long-term financial health.
In this article, we delve into the ESG criteria, explain why they are relevant to companies, and see how they can be integrated into a sustainable business strategy.
The ESG (Environmental, Social and Governance) criteria refer to three key factors a company should have present to guarantee long-term sustainability.
The past few years have seen an increased focus on ESG as investors and consumers alike have begun to favour companies who show concern for the social and environmental impact of their business operations.
No one could have imagined how far it would come when Sustainability first became the new paradigm for companies at the start of the 21st Century.
John Elkington, in The Triple Bottom Line (1994), alluded to how companies needed to account for not only their financial data, but also their environmental and social impact – thus creating a three-part accounting framework. The Global Reporting Initiative (GRI) became the main worldwide standard for Sustainability reports in 1997, and two years later, the UN launched Global Compact, the greatest voluntary initiative for Corporate Social Responsibility (CSR), containing the Ten Principles of the UN Global Compact regarding human rights, employment, environment and anti-corruption.
Since then, the ESG concept has become increasingly relevant combined with Sustainability due to its use in the field of Sustainable and Responsible Investment (SRI). This has led to increased demand for sustainability reports and the need to measure and improve a company’s ESG development.
According to the MSCI definition, the ESG ratings measure the long-term resilience of an organisation against sectoral risks in environmental, social and governance matters. Below, we take a more in-depth look at what each of the criteria mean:
The results of each category are compiled to create an ESG report which summarises all the company’s non-financial information. So why is this relevant?
The focus on ESG criteria has become increasingly important over the past few years, as investors and consumers alike have begun to favour companies which show concern for the social and environmental impact of their business operations.
Furthermore, companies who better control environmental, social and governance challenges can hold a competitive advantage over others in the market which could lead to greater financial stability in the long term. This is because companies who take into account this criteria can mitigate risks involved with legal issues and protect their reputation, as well as attract investors and consumers who are increasingly conscious of the environmental and social impacts.
ESG has become more pertinent as legislation has developed in CSR matters, above all since 2015, a turning point in sustainability management with the Paris Agreement to combat climate change and the ratification of the Sustainable Development Goals (SDG) by the UN to make the world a more inhabitable and sustainable place.
We can therefore conclude that increased relevance of ESG is down to two main factors:
What’s more, companies who have a high ESG rating are considered more sustainable and less at risk, which is attractive to investors in the long term.
To a large extent, this reduced risk is related to risk analysis of factors within these criteria.
ESG risks, also known as non-financial or sustainability risks, include climate change impact, adherence to human rights and labour relations, management structure and tax compliance.
Poor ESG risk management can negatively affect businesses and could lead to serious financial and reputation problems.
Interest groups are more concerned about the corporate social responsibility of companies, and risk management in this area is fundamental to maintaining a good image.
Although not obligatory for all, Law 11/2018 establishes the need to report ESG risks in the Non-Financial Information Statements (NFIS). If not included in the report, a company must justify its absence.
What non-financial risks associated with the environment must be taken into consideration? Waste management, carbon footprint, contamination and impact on climate change are just some examples.
And what about social risks? Human capital management, equal opportunities and equality in the workplace, diversity, and health and safety are some examples of issues to take into account.
Finally, what risks related to governance should be considered? These include corruption, bribery, directors’ pay, tax and equality on the board of directors.
It is important to consider what risks are interconnected and how their efficient management is key to any company committed to sustainability.
Integrating ESG criteria into the company can have both short-term and long-term benefits. If some management teams were still to doubt the relevance of ESG criteria, here we outline some of their undoubted benefits:
In conclusion, the ESG criteria are a key factor to guaranteeing the long-term sustainability of a company. It is crucial for businesses to understand the environmental, social and corporate government challenges they face, and draw up suitable strategies to deal with them.
Integrating Sustainability and ESG criteria is not just for large companies. It can be a differential value for any business, regardless of its size, including SMEs.
If you are starting to integrate ESG, here are a few tips:
If your organisation has still not started to manage ESG criteria or finds such work cumbersome, here at APLANET, we can help you.
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