ESG And Sustainability EXPLAINED

ESG and sustainability are 2 words that I’m hearing more and more in the financial world. However, what’s the difference between them?

ESG is a framework that evaluates the environmental, social, and governance aspects of a business to help investors evaluate the long-term viability of the company’s actions. Sustainability is instead a broader concept defined as meeting the needs of the present without compromising the ability of future generations to meet their own needs.

Key Takeaways

  • ESG focuses on a company’s environmental, social, and governance practices.
  • Sustainability encompasses broader goals of long-term ecological, social, and economic health.
  • ESG is a tool within the broader context of sustainability to assess and guide corporate behavior.

As you can see, ESG and sustainability are 2 different things even if often they are used as if they were interchangeable.

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What is ESG?

ESG stands for environmental, social, and governance, serving as a critical framework for investors to assess a company’s long-term sustainability and potential for generating returns without harming society or the environment.

This approach is increasingly popular as investors seek not only financial gains but also positive global impacts.

Sustainable investments, guided by ESG criteria, are demonstrating their potential to outperform traditional investments, with data showing a 4.3% higher performance in 2020 according to Morgan Stanley. This trend is propelling the growth of sustainability-focused funds, which are nearing the $2 trillion mark.

The 3 pillars of ESG

The three pillars of ESG provide a framework for companies to evaluate their societal and environmental impact, guiding investors in assessing a company’s long-term viability and ethical practices within these domains.

Pillars of ESG:

  1. Environmental: Focuses on a company’s ecological footprint, including carbon emissions, renewable energy usage, and waste management.
  2. Social: Evaluates a company’s treatment of employees, diversity and inclusion efforts, and community engagement.
  3. Governance: Concerns itself with corporate governance aspects like board diversity, executive pay, and shareholder rights.

What is Sustainability?

The term “sustainability” is often used when referring to sustainable development. The Brundtland report defined sustainable development as “meeting the needs of the present generation without compromising the ability of future generations to meet their own needs.”

Sustainability in business necessitates balancing the 3 pillars: environmental, social, and economic factors. Ensuring that operations are harmonious with nature, beneficial to society, and economically viable, fostering long-term resilience and growth.

Triple Bottom Line Components:

  1. Environmental Sustainability: Focuses on reducing the ecological footprint and enhancing environmental stewardship.
  2. Social Sustainability: Emphasizes equitable treatment of stakeholders, community engagement, and employee welfare.
  3. Economic Sustainability: Ensures financial viability and long-term profitability without compromising environmental and social responsibilities.

Importance of ESG

There are a number of reasons why ESG considerations are important:

  • Investors need to know whether companies are doing their part to reduce their carbon footprint and whether they are prepared for a low-carbon future.
  • Issues such as diversity, inclusion, and human rights are all factors that can affect a company’s bottom line. Investors need to know whether a company is treating its employees and other stakeholders fairly.
  • Investors need to know whether a company is being run in a way that is likely to create value over the long term. This includes factors such as executive compensation, board structure, and shareholder rights.

ESG investing is not just about doing good. It is also about creating a more sustainable and profitable portfolio.

Studies have shown that companies with strong ESG ratings outperform their peers over the long term. This is likely due to the fact that companies with strong ESG ratings are better managed, have happier and more productive employees, and are more likely to be involved in their communities.

Benefits of Implementing ESG

There are numerous benefits that come with implementing ESG in businesses and organizations:

  • Brand Reputation – ESG can help boost a company’s or brand’s reputation. This is because when consumers see that a company is committed to sustainability, they are more likely to view it in a positive light and be loyal to the brand.
  • Save Money and Reduce Environmental Impact – ESG can help save the company money by reducing the environmental impact and consumption of natural resources.
  • Attract Talent – ESG can help a company attract and retain top talent, as more and more employees are looking for workplaces that align with their values.
  • Improved Resilience – ESG can help businesses build resilience in the face of climate change and other environmental challenges.
  • Attract More Investments – A business pursuing sustainable development is more attractive and less risky for long term investments. This is why implementing ESG reporting can help corporations to rise capital in the financial markets.
  • Improves Competitivity – Companies that implement ESG practices often find that they end up developing more modern business operations and manufacturing based on digital transformation technologies, grabbing all of the benefits of industry 4.0. This can dramatically improve business competitivity!

How to Implement ESG

There is no one-size-fits-all answer to the question of how to implement ESG (environmental, social, and governance) principles into business practices.

While some companies may choose to adopt an all-encompassing approach, others may prefer to focus on specific areas where they feel they can have the most impact. The key is to start somewhere and to continually strive to do better.

Some tips for how to implement ESG into business practices include:

  • Conduct a thorough review of all business practices and operations, and identify areas where improvements can be made.
  • Engage all employees in the process, and ensure that everyone is aware of and committed to the company’s ESG goals.
  • Implement policies and procedures that reflect ESG principles, and monitor compliance on an ongoing basis.
  • Communicate the company’s ESG achievements and goals to shareholders, investors, and the general public.

Adopting ESG principles is not only the right thing to do for the environment and society, but it can also be good for business thanks to its benefits.

ESG Metrics

ESG metrics are a set of standards used to measure the environmental, social, and governance performance of a company.

The goal of ESG metrics is to help investors identify companies that are doing well in terms of sustainability and corporate responsibility.

There are a variety of ESG metrics that investors can use to assess companies. Some of the most common metrics include greenhouse gas emissions, water use, energy use, waste generation, and employee safety.

Companies that score well on ESG metrics are typically considered to be more sustainable and responsible than those that score poorly.

This can be a valuable consideration for investors who are looking to put their money into companies that are making a positive impact on the world.

Practical steps to improve ESG metrics may include investments in green technology, for example by installing LED light bulbs or focus on getting the benefits of solar energy and moving away from non-renewable resources and fossil fuels.

More in general, businesses will tend to implement more sustainable business practices. This helps the business to give its contribution toward reaching the sustainable development goals and, at the same time, ensures its long-term success.

The ESG Reporting Process

There are a number of ways to report on environmental, social, and governance (ESG) topics. The most common way is to use a third-party reporting platform.

These platforms provide companies with a comprehensive way to report their ESG performance. The platforms also allow companies to track their progress over time and compare their performance to their peers.

The second most common way to report ESG topics is to use a company’s own internal reporting process.

This can be done through a variety of means, including annual reports, sustainability reports, and other corporate communication channels. While this approach gives companies more control over their ESG reporting, it can be more resource intensive.

The third way to report ESG topics is through voluntary disclosure.

This disclosure can take many forms, such as sustainability reporting frameworks, the Global Reporting Initiative, and the Carbon Disclosure Project.

For example, the Global Reporting Initiative (GRI) is an international organization that provides guidance to companies and organizations on how to disclose their environmental, social and governance performance.

The GRI has a set of standardized reporting guidelines that are internationally recognized and used by companies, organizations, and other stakeholders to assess and compare sustainability performance.

The GRI guidelines are voluntary, but many companies and organizations choose to use them to report their performance publicly. The GRI also offers training and support to help companies and organizations prepare their reports.

While voluntary disclosure is not required by law, it is becoming increasingly common as investors and other stakeholders demand more information about a company’s ESG performance.

The Future of ESG

The future of ESG is to continue becoming more mainstream and integrated into investment decisions.

The UN Sustainable Development Goals provide a framework for how ESG can be used to achieve global sustainability objectives.

While there is still work to be done in terms of data standardization and reporting, the increasing awareness and understanding of ESG factors will result in more and more investors considering them when making investment decisions.

This will in turn lead to more companies taking steps to improve their ESG profile, creating a feedback loop that will accelerate the mainstreaming of ESG.

Blockchain-based Automated ESG financing

New digital transformation technologies such as blockchain can be used to support sustainable practices for businesses and also ESG.

In the near future, we are likely to see fully automated ESG financing solutions powered by blockchain, smart contracts, and IoT.

This means that ESG financing could be set up with a set of pre-agreed conditions in the blockchain and data feeds that will automatically execute the contract when certain targets are met.

Thanks to the blockchain and pre-agreed data feed collected with IoT devices, it is possible to have a fully decentralized process free from any bias and without the need for any third party.

For example, if your business gets a loan and agrees that the company will pay a higher interest rate if by a certain date it will not meet a specified emissions target. This and the source data feed containing the emissions from the factory can be pre-programmed in a smart contract and executed automatically at the desired date.

The smart contract will automatically calculate the interest rate to apply for the loan based on the data it receives from the pre-agreed source.