What is ESG?
A set of criteria against which companies and organisations can be measured in order to assess their performance in a way which looks beyond the return on shareholder capital.
ESG is important to ethical investors who evaluate companies based on their values and their impact. ESG reporting provides an accountability framework for stakeholder capitalism.
Environmental, social and governance (ESG) investing is a strategy you can use to put your money to work with companies that strive to make the world a better place.
ESG investing relies on independent ratings that help you assess a company’s behavior and policies when it comes to environmental performance, social impact and governance issues.
Here’s a closer look at the three criteria used to evaluate companies for ESG investing:
Environment. What kind of impact does a company have on the environment? This can include a company’s carbon footprint, toxic chemicals involved in its manufacturing processes and sustainability efforts that make up its supply chain.
Social. How does the company improve its social impact, both within the company and in the broader community? Social factors include everything from LGBTQ+ equality, racial diversity in both the executive suite and staff overall, and inclusion programs and hiring practices. It even looks at how a company advocates for social good in the wider world, beyond its limited sphere of business.
Governance. How does the company’s board and management drive positive change? Governance includes everything from issues surrounding executive pay to diversity in leadership as well as how well that leadership responds to and interacts with shareholders.
For many people, ESG investing goes beyond a three-letter acronym to address how a company serves all its stakeholders: workers, communities, customers, shareholders and the environment.Source: Forbes, E Nepoletano and Benjamin Curry
What Gets Measured Gets Managed: How ESG Reporting Can Help Save The Planet
For companies that have rapidly grown from startups, the ESG journey often requires graduating from a founder-driven focus on quarterly revenue growth to a purpose-driven strategy that considers a wide range of stakeholders and their interests.Source: World Economic Forum Strategic Intelligence
Investors are increasingly a key driver of this progression. This might entail short-term costs such as hiring ESG professionals or setting up internal ESG key performance indicator (KPI) measurement and reporting systems.
But the long-term benefits will come through areas such as improved risk management, identification of ESG-related opportunities, enhanced brand value for consumer related businesses, lower cost of capital (via ESG-index inclusion or green financing) or efficiency gains resulting from reduced emissions, waste or resource consumption.
In addition, a reputation for sustainability and social responsibility can attract and retain talent from a generation of employees who prefer working at organizations whose values are aligned with their own.
Where can you find guidelines and benchmarks?
ESG guidelines can be found from recognised international sources. ESG will be built into the new EU ESG Regulatory Framework pursuant to the Paris Agreement on Climate Change. We have provided links to further sources below. We will be building up this resource bank over time as this topic matures.
ESG Investing: Practices, Progress and Challenges
25/09/2020 – While the mainstreaming of forms of sustainable finance is a welcome development, the terminology and practices associated with ESG investing vary considerably. One reason for this is that ESG investing has evolved from socially responsible investment philosophies into a distinct form of responsible investing. While earlier approaches used exclusionary screening and value judgments to shape their investment decisions, ESG investing has been spurred by shifts in demand from across the finance ecosystem, driven by both the search for better long-term financial value, and a pursuit of better alignment with values. This report provides an overview of concepts, assessments, and conducts quantitative analysis to shed light on both the progress and challenges with respect to the current state of ESG investing. It highlights the wide variety of metrics, methodologies, and approaches that, while valid, contribute to disparate outcomes, adding to a range of ESG investment practices that, in aggregate, arrive at an industry consensus on the performance of high-ESG portfolios, which may remain open to interpretation.Source: Boffo, R., and R. Patalano (2020), “ESG Investing: Practices, Progress and Challenges”, OECD Paris, www.oecd.org/finance/ESG-Investing-Practices-Progress-and-Challenges.pdf
OECD Due Diligence Guidance for Responsible Business Conduct
The objective of the OECD Due Diligence Guidance for Responsible Business Conduct (Guidance) is to provide practical support to enterprises on the implementation of the OECD Guidelines for Multinational Enterprises by providing plain language explanations of its due diligence recommendations and associated provisions. Implementing these recommendations helps enterprises avoid and address adverse impacts related to workers, human rights, the environment, bribery, consumers and corporate governance that may be associated with their operations, supplySource: https://www.oecd.org/investment/due-diligence-guidance-for-responsible-business-conduct.htm
chains and other business relationships. The Annex to the Guidance includes additional explanations, tips and illustrative examples of due diligence.
This Guidance also seeks to promote a common understanding among governments and stakeholders on due diligence for responsible business conduct. The UN Guiding Principles on Business and Human Rights as well as the ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy also contain due diligence recommendations, and this Guidance can help enterprises implement them.
Interim Study into the development of tools and mechanisms for the integration of ESG into EU Banking
December2020 INTERIM STUDY Development of tools and mechanisms for the integration of environmental, social and governance (ESG) factors into the EU banking prudential framework and into banks’ business strategies and investment policiesSource: https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/201214-interim-study-esg-factors-banking_en.pdf
ISO 26000 Guidance on Social Responsibility
ISO 26000:2010 provides guidance rather than requirements, so it cannot be certified to unlike some other well-known ISO standards. Instead, it helps clarify what social responsibility is, helps businesses and organizations translate principles into effective actions and shares best practices relating to social responsibility, globally. It is aimed at all types of organizations regardless of their activity, size or location.
The standard was launched in 2010 following five years of negotiations between many different stakeholders across the world. Representatives from government, NGOs, industry, consumer groups and labour organizations around the world were involved in its development, which means it represents an international consensus.Source: https://www.iso.org/iso-26000-social-responsibility.html
The role of Artificial Intelligence in ESG
AI is taking a leading role in assisting stakeholders in their effors to compare and assess companies ESG ratings. from Natural Language Processing which analyses the sentiment and tone of a company’s statements to reducing the repetitive tasks associated with KPI reporting. AI is now a vital part of the evaluation process because it can analyse vast quantities of information very quickly.
When combined with satellite technology, AI can analyse the impact of evironmental policies over time, providing key reports on climate change factors.
For supply chain verification and monitoring, blockchain is proving to be a useful tool in providing an indelible audit trail back to source.
As a result of being better informed, global policies can be more closely aligned with ESG reporting goals to ensure that there is a real and measurable impact.