ESG Frameworks

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What is ESG?

ESG stands for Environmental, Social and Governance. Whilst many wouldn’t have even heard of the term 5 years ago, ESG is now deeply intertwined and is a great concern of every business. A strong ESG strategy or framework can add immense value to a company and ignoring any responsibility towards ESG can result in a lack of investment and even failure of your company. This is because being proactive and maintaining a high commitment to ESG statistically correlates with higher equity returns and a lower downside risk, including lower loan and credit default swap spreads and high credit ratings.

The E in ESG stands for the environmental criteria. This refers to the input versus output of waste your company discharges, its carbon emissions, and response to climate change.

The S in ESG stands for the social criteria. This addresses your company’s social reputation and the relationships it holds with people, other institutions, and the general community. It also includes diversity and inclusion initiatives and labour relations.

The G in ESG stands for governance. This refers to the internal systems in place and practices within the company to govern itself, comply with legal regulations and meet the demands of external stakeholders. All companies require governance due to them being legal entities.

Whilst it is helpful to distinguish between the various components of ESG for simplicity of explanation, the three elements are truly intertwined. For example, the social aspect overlaps with the environmental and governance aspects when companies are trying to conform to environmental laws and broader concerns about sustainability.

How will a commitment to ESG strategies add value to your company?

1. Top-line growth: High-level commitment to ESG initiatives enables companies to reach new markets and expand into existing ones. If the governing authority can trust its corporate actors, they are significantly more likely to grant them the access, approvals, and licenses that create opportunities for growth.

2. Cost reductions: It has been proved that ESG can substantially reduce costs. Executing ESG effectively can reduce costs by combatting rising operating expenses such as raw-material costs and the true cost of carbon.

3. Reduced legal and regulatory interventions: Committing to ESG enables companies to reach greater strategic freedom and thus ease pressure from regulations. Not only does it reduce risks of adverse government action, but it can even engender government support.

4. Increase employee productivity: Valuing and committing to ESG helps companies to retain and attract the top employees who are increasingly using a company’s ESG strategies as a measure of company success and job satisfaction. It can also enhance employee motivation by instilling a sense of community and purpose.

5. Investment and asset optimization: ESG commitments have proven to enhance investment returns by assigning capital to more encouraging and sustainable opportunities, for example renewable energy. Investors are also significantly more likely to invest in a company that is focused on the sustainable future and has a respectable social and governance reputation.

What are the different ESG Strategy Frameworks?

ESG reporting is currently only loosely regulated so it is up to the company to decide which framework to adhere to. That said, it is believed that basic ESG reporting will soon become mandatory in the EU and elsewhere. Presently, there are various popular standards that can help your company establish a strong ESG performance measurement.

  1. The Global Reporting Initiative (GRI)

  2. The Sustainability Accounting Standards Board (SASB)

  3. International Integrated Reporting Council (IIRC)

  4. The Workforce Disclosure Initiative (WDI)

  5. The Task Force on Climate-Related Financial Disclosures (TCFD)

  6. The Climate Disclosure Standards Board CDSB)

Third-Party standards include:

  1. Boardclic’s ESG Index

  2. Morgan Stanley Capital International (MSCI)

For More on ESG Strategies:

What is ESG?

ESG Criteria

ESG Asset Analysis

ESG Investing and Analysis

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