The Green Billions

Environmental, Social & Governance (ESG)

Environmental, Social & Governance (ESG) is a systems approach for impact beyond economic goals. Based on the triple bottom line accounting framework, it approaches environmental and social goals and sound governance methods as necessary for long-lasting, risk-averse value creation and stewardship. It espouses approaching business through the lens of stakeholder capitalism or holistic value creation for all stakeholders, investors, and consumers beyond mere shareholder returns. 

Goal setting 

Environmental goals often include CO2 emission reduction, resource management, supply chain optimization, waste management, and recycling. In contrast, social plans include diversity, equity, and inclusion (DEI), employee engagement, collaborative work culture, and corporate social responsibility (CSR). Governance refers to integrating environmental and social considerations and relevant risk management activities into management and strategy. 

ESG is growing in importance for its role in transparency, risk reduction, opportunity management, corporate reputation, and culture & intrinsic value. By identifying and acting on risk and opportunity areas, organizations can build resilience and grow in new, upcoming niches, securing long-term value creation. A great example is Unilever, which has achieved greater profitability and market penetration by supporting micro & small businesses and local distribution networks [1]. Further, better ESG performance indicates to investors and stakeholders the awareness and preparedness for market and reputational risk. Focus on ESG also gives competitive advantages such as attention to organizational resilience, especially in the face of the growing frequency of climate change-related natural calamities and increased environmental awareness & activism, which could be disruptive to operations, supply chains, and reputation. 

How can my organization report its ESG performance? 

Reporting is encouraged to be standardized, transparent, timely, accurate, and consumable in a financially material, comparable, reliable, and consistent manner. There are many standardized ESG public-facing and investor-facing reporting frameworks, such as the Task Force on Climate-Related Financial Disclosures (TCFD), Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI), and the United Nations Sustainable Development Goals (SDGs). The objective of these frameworks is to inform internal & external stakeholders of the organization’s integration and management of ESG risks and ambitions toward ESG opportunities. 

Organizations’ environmental performance is reported through environmental stewardship and compliance with the Paris agreement, the Kyoto Protocol, and the GHG Protocol quantifies organizations’ environmental performance. The data for this can be generated by GHG inventorization (a.k.a. carbon accounting), which also enables the setting of science-based targets for emission reduction. 

Social performance can be captured in the well-being of internal & external stakeholders through community and human capital development, employee welfare, and occupational health & safety.

Governance is described through board oversight and ESG risk management tactics. All such reporting should be through publicly available sources, viz. reports, webpages, tax reports, relevant industry reports, and ESG rating/ranking agencies. Otherwise, the organization risks letting investors and stakeholders make uninformed assumptions. By following standardized frameworks, ESG information can be easily ‘benchmarked’ or systematically evaluated and/or ‘rated’ by rating agencies to compare and assess performance within and across industries. Rating agencies often emphasize criteria determined by industry, sector, and accepted standards. Thus, it is important to contextualize ESG information to communicate strategy and management effectively. 

Why is ESG reporting valuable for investability in the long-term future? 

Communication of ESG goals, management, strategy, and progress, drives the perception of ‘ESG maturity,’ corporate culture, and long-term value. This affects corporate valuation, shareholder voting, and other key decisions by integrating ESG into a long-term strategy via science-based decarbonization targets, employee engagement, and DEI. These cumulatively improve the organization’s financial baseline – research shows that companies including ESG in their strategy often outperform their peers in terms of stock returns [2]. ESG maturity can also be seen in organizations favoring holistic corporate engagement over just reactions to situations. This can include drawing up goals, policies, and business cases for action and engagement strategies. Mature ESG reporting includes strategic roadmaps tomitigate risk/translate opportunities and well-oiled internal mechanisms to implement ESG strategy. The growing understanding is that integrating ESG considerations into investment analysis can be a fiduciary duty. Increased awareness of climate change and social inequalities among stakeholders and society is a prime driving force. Above 30-40% of global assets under management now are represented and reported on by the members of the ESG movement. 

Among the most important goals of the ESG movement is to create corporate purpose by understanding decision-making and organizational resilience as major drivers in the current and upcoming landscape. By tools such as scenario planning, organizations are encouraged to plan mitigation and adaptation strategies for possible catastrophes resulting from physical, transition, market, and labor risks. These planning horizons stretch further beyond the strategic planning horizons commonly prepared by organizations. Often, this includes plans and targets for 10-30 years hence. Organizations are therefore encouraged to think long-term and secure their future in a changing ESG landscape. 

Author’s Take | ESG is an ever-expanding iteration of systems thinking approaches that comprehensively view business. It encourages organizations to look beyond short-term monetary gain to the much longer-term social, environmental, and management considerations that can secure future value-creation. By taking the risk management perspective, ESG also ensures long-term stability, thereby making access to credit and investment easier for growing companies.

About the author Krishnakumar Ramachandran | Krishna is a Biosystems Engineer and Biotechnologist with a background in sustainability, biobased transition, bioplastics and biofuels, energy, agribusiness, and natural resources. Having worked in R&D and having started up, he ‘transitioned’ to sustainability to make a tangible impact to people and the environment. As a freelancer, he works with sustainability consultancies in ESG, GHG accounting, carbon offsets and credits, and tech-advisory. He writes articles on sustainability strategy, corporate sustainability, energy transition risks.