ESG is an acronym for Environmental, Social and Governance. It is used to identify companies that have implemented in their business strategy a series of values for raising awareness of environmental, social and governance issues so that these work in practice.
What is ESG?
ESG criteria are those which companies follow in order to call themselves sustainable in environmental, social and governance areas. This means, they shift their priority away from conventional mass economic growth, to a slower growth which takes into account activities which can impact the planet which could be negative if not cared for.
Companies have to integrate this into their employment culture, allowing for the environment, their workers and their entire production structure to benefit from the business activity, but not just financially. It encompasses the idea of not forgetting about details and making sure the entire company has a sustainable framework in these three areas.
It is important to keep in mind that all criteria are fulfilled before categorising a company as being sustainable, as if companies do not satisfy these criteria, we could be witnessing corporate greenwashing.
ESG criteria in companiesIt is not enough to declare oneself respectful towards the environment when, for example, facilities are adapted to laws; for corporate culture to align itself with ESG criteria, it should implement measures which keep in mind employee wellbeing and which add value to society.
ESG criteria: environmental aspect
For companies to fulfil environmental criteria, it is not enough for them to mitigate the damaging aspects of their activity, but rather they should instead be helpful to the environment and their surroundings. The ideal is for them to have a proactive vision which aligns with sustainable development of natural resources, which can lead to environmental improvement. Some examples of favourable actions for the environment may be:
- The fight against deforestation;
- Use of clean renewable energy;
- Reducing or eliminating CO2 emissions.
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ESG Criteria: social aspects
A company which follows ESG criteria, is a company which respects Human Rights of workers and of groups involved in its activity. The social criteria include wellbeing of workers, clients and any social element affected by the business activity, as well as fulfilling criteria of social inclusion and equality.
This area also includes employment conditions which protect workers’ wellbeing above and beyond economic benefits, thanks to elements such as flexible hours, a work-life balance, among others. Some examples could be:
- Not carrying out your business activity in developing countries solely to find cheaper production costs, taking advantage of laws that justify job insecurity;
- Respecting the rights of workers;
- Applying corporate culture which promotes workers’ wellbeing, their comfort at work, promoting a work-life balance, among others;
- Horizontal work structures.
ESG criteria: governance aspects
This final area encompasses everything related to corporate culture, transparency in corporate actions of the company with its stakeholders, a company’s quality in the hierarchy of its tasks and management processes. Things such as managers being openly committed to fighting unethical work practices are valued.
To evaluate this it is necessary to create internal transparent work policies and clear rules on solvency, managing any external work, etc. Some examples which show ESG criteria in corporate governance are the following:
- Fiscal and procedural transparency;
- Official certifications in Corporate Social Responsibility;
- Warning all users that may be affected on the continuous improvement of business elements.
ESG investing: the new way to understand financing
New investors increasingly value companies which apply these criteria, which are here to stay. The current approach to creating companies is not centred on extreme financial growth, where businesses search for the easiest way to mass produce at the lowest cost. New types of business look to produce consciously and in line with sustainable development.
Working under the ESG criteria is an entirely voluntary decision, and for this reason, companies that include these criteria in their corporate culture acquire more and more value.
The importance of incorporating social, environmental and governance capital when calculating a company’s value or the value of an asset started to be taken into account a few decades ago. Analysing the environmental, social and good governance value is a declaration of a commitment to a quality service and to values on the business and client’s side.
Responsible investmentTypes of investment which take into account the ESG criteria are known as sustainable investment or responsible investment. The United Nations (UN) published a text which covers the Principles for Responsible Investment, through which the institution itself committed to collaborate with entities including these criteria in their production and work processes.
Corporate Social Responsibility in the ESG criteria
Corporate Social Responsibility (CSR) is a way of managing a company in a way that takes into account the impact its business activity has on clients, society, workers, investors and any action group which may be affected.
It is a way of working that can be integrated voluntarily into companies, with official certifications in which an external company audits the business activity in order to confirm its responsible business commitment. There are 5 main principles that regulate CSR:
- CSR means abiding by legislation.
- The fulfilment of their principles is global and cross-sectional.
- A commitment to ethical and coherent objectives.
- Identifying and managing the impact of the business activity.
- Satisfying the expectations and necessities.
ESG investments: financial growth and sustainability
Until the concept of Social Responsibility arose at the end of the twentieth century, globalisation had favoured large corporations in their economic and financial growth exponentially, based solely on producing the largest amount possible at the lowest cost, often by taking advantage of tax exemptions in developing countries, where human rights and workers’ rights were not as advanced and therefore, led to a lower business cost.
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ESG criteria have appeared during a time of global collapse in which it is unsustainable to continue producing in this manner, ignoring the global impact of the business activity of a company, which urgently needs to start taking account of how to reduce its externalised workforce, until it can eliminate it altogether.
ESG funds: Which is the best option?ESG investing, as mentioned, is a strategy that involves putting savings and investments in companies that are making a difference to the environment and social change. If you are new to this ESG world though, it can be daunting to know which is the best option for you. Do not worry - most UK banks will be able to offer advice, while financial and business magazines, such as Forbes, also publish articles regularly with information on the best ESG funds to invest in.
Is the environmental impact incompatible with financial growth?
ESG criteria and other social responsibility cultures have come to prove that the economic growth of a company can develop in a sustainable manner which is respectful of its environment.
ESG criteria have come to regulate the negative impact of businesses in general and of multinationals in particular, especially on social, employment and Human Rights
The culture of sustainable investment has also raised awareness in markets so that they have come to be guided by these objectives. Most new companies have already started implementing them before they even start billing. Far from being a fad, ESG criteria are here to stay in the corporate culture of companies that will succeed in the future.
One of the clearest examples is the rise of companies that increasingly work with renewable energy. Betting on clean energy is a very important step when it comes to fighting climate change.
ESG criteria in the UK
UK companies, large and small, have been implementing ESG strategy in recent years, including iconic names such as Lloyds. While the adoption of ESG criteria may be taking slightly longer in more traditional, established businesses, luckily, new young companies, especially start-ups, are already born with all these environmental, social and governance values embedded, with the transparency of their operation a key point and using modern and innovative technologies for continuous improvement.
There are several official certifications recognised at national, European and global level, to reward companies that work in line with ESG and CSR criteria.
- Examples of ESG certifications in the UK
- B Corp
- Planet Mark
- Good Business Charter
- Social Value UK
- United Nations Global Compact
Today, more and more companies are interested in making a positive impact on society. As a result,Selectra offers a carbon footprint compensation service, in which companies can reward employees for their efforts and thank clients for their business buy helping them offset their emissions and continue the fight against climate change.