“What is ESG?”
ESG stands for Environment, Social and Corporate Governance (ESG). It is traditionally an investing philosophy which considers standards of social responsibility when evaluating a company for investment instead of just considering maximizing of returns on investment.
ESG isn’t terminology many of us outside of the financial sector will be too familiar with, it is a broad and complex topic and covers a multitude of areas, but in basic terms it is an evaluation of a company’s collective conscientiousness for social and environmental factors with 3 areas of criteria:
• Environment criteria refers to how well a company performs with respect to their environmental impact;
• Social criteria refers to how a company manages relationships with employees, customers and the communities in which it operates; and
• Governance criteria refers to a company’s leadership, internal controls, audits, executive pay, and shareholders rights.
Is ESG only applicable to the financial sector?
Traditionally an investing philosophy, ESG considerations risks and evaluations have mainly been utilised by the financial sector but the benefits of a collective conscientiousness are now being recognised across many other sectors as value add.
Considering ESG criteria as part of a businesses strategy planning and risk management is becoming increasingly important to the overall sustainability of the business, and is moving away from the old investment philosophy view.
ESG is increasingly being recognised as a great way of evaluating the social conscience of every business, and an area of operational and enterprise risk that may not have previously been considered.
Considering ESG within a business
Where ESG initiatives may previously have been thought of as a ‘nice to have’ or ‘not really relevant’ by many businesses, they are now often seen as an essential part of business strategy planning, sustainability, and risk management.
A business will face increased operational and strategic risks if they do not consider their own sustainability, environmental impact, and ESG risks. One of the most material aspects of ESG is risk management, specifically identifying, managing and mitigating ESG risks within each business.
As many businesses already include some sort of risk framework and risk assessment process within their overall model, ESG and its associated risks can be incorporated relatively simply by including the 3 main criteria (Environment, Social, Governance) as large headline risks within the framework, and drilling down into each of these areas for the more detailed risks relative to each business.
Incorporating ESG considerations
Building identified ESG risks into existing risk frameworks provides evidence of their consideration and identification and enables the management, mitigation and ongoing measurement of their impact and current status.
Incorporating ESG criteria into business planning and strategy and considering the associated risks as part of the overall risk framework ensures businesses develop, improve, grow, and remain ahead of regulation and legislation requirements.
A current and timely example of the importance of ESG considerations, risks, and initiatives is the government requirement for all businesses to meet the COP26 and Paris Agreement requirement of 60% reduction in Green House Gas Emissions by 2030 and Net Zero Emissions by 2050.
Considering and addressing ESG risks enables businesses to work towards adhering to this high level requirement by identifying the individual components and incorporating them into their overall risk framework and risk management processes and systems.
By working closely with businesses and understanding their strategy and model, Achieving Greenness provides solutions to apply correct processes, systems and techniques, and implement sustainable and achievable action plans to reduce and improve the business’s environmental impact in both the short and long term.
