ESG (Environmental, Social, and Governance) criteria help to evaluate companies on their non-financial performance and sustainability progress. The term was first used in 2005. Today, “ESG friendly” score gained substantial importance for investors as it considers the ethical side of the companies and has a wide spectrum of issues that are traditionally excluded from financial analysis:
- Climate change
- Food safety
- Usage of renewable resources
- Greenhouse gas emissions
- Working conditions
- Respect for human rights
- Health and safety
- Employee relations and diversity
- Executive pay
- Board composition, diversity and structure
- Tax strategy
Why is ESG growth accelerating?
The COVID-19 pandemic has caused economic pressure on some industries, which has affected companies' exposure to and ability to manage ESG risks. Companies face increasing challenges and increased scrutiny if they do not adequately manage their ESG or climate risks. The shift towards ESG activities may become the only way for companies to remain successful in the near future.
Since ESG criteria are part of the investment process, companies are pushing to “adapt” the standards in order to impact their revenues. This, in turn, helps the whole economy to be more sustainable and “green”. The approach is widely supported by the European regulations that are moving to the implementation of the ESG rules in any business-related areas.
Here is what your company can do
Step 1: Assess your current state, identify potential risks, map metrics to corporate goals and establish a governance structure.
Step 2: Use a materiality analysis to engage with key internal stakeholders and establish priorities around strategy, goals, and metrics.
Step 3: Collect and consolidate information for reporting. You must systematize responding to a wave of third-party ESG ratings.
- Sustainalytics - a leading provider of ESG ratings, data and research thay supports ESG investors. It works with more than 200 indicators.
- Bloomberg — provides data about the company’s ESG metrics.