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ESG: A New Arena of Corporate Culture

Responsible investing is widely understood as the integration of environmental, social and governance (ESG) factors into investment processes and decision-making.  For those who don’t know the concept of ESG, let us first take a glimpse of what ESG really is.

ESG is the acronym for Environmental, Social, and Corporate Governance, the broad three areas of concern for socially responsible investors. ESG criteria are a set of standards for  evaluation of a company’s operations that socially conscious investors use to screen potential investments. The term ESG was first coined in 2005 in a landmark study entitled “Who Cares, Wins.”

The ‘3 pillars’of ESG: Environmental, Social, Governance

Three elements of ESG investing – environmental, social, and corporate governance – comprises a number of criteria that may be considered by the corporates and socially concerned investors. These 3 pillars are discussed below:

ESG – Environmental

Environmental criteria consider how a company performs as a steward of nature. This includes company’s use of renewable energy sources, its waste management program, how it handles potential problems of air or water pollution arising from its operations, deforestation issues and its attitude and actions around climate change issues.

ESG- Social

Social criteria examine how the company manages relationships with employees, suppliers, customers and the communities where it operates. It also includes fair remuneration to employees, employee training and education programs, employee engagement with management, safety at workplace.

ESG- Governance

Governance criteria deal with a company’s leadership, executive pay, audits, internal controls and shareholder rights. Financial and accounting transparency are considered key elements of good corporate governance.  Investors too want an assurance that there is no conflict of interests regarding the appointment of BOD. These helps the companies to formulate policies ensuring that company executives take on a strong vested interest in the company’s success.

ESG Reporting

Apart form regular reporting Compliances, entities will be required to disclose data, facts, impacts, value additions made by the entity t the ESG Factors. In the upcoming era, companies will now be required to report on their overall contribution to the Society at large, rathe than just presenting financials figures on risks and returns.

Impact of ESG

ESG-minded business practices gain more attraction and socially responsible investors are increasingly tracking their performance. Moreover, high-ESG companies experience lower cost of capital, less volatile earnings and lower market risk compared to low-ESG companies. ESG criteria signals to a risk factor which helps the companies to avoid such risks and uncertainties.

ESG is not without criticisms. One of the most important concern is that investing in unprofitable, non-significant projects may divert limited financial resources into unsustainable business models.

Despite the criticisms, ESG becoming increasingly popular and is most likely to be an investing approach used by millennials.

Although ESG metrics are not currently a required part of financial reports for publicly traded companies, a growing number of companies are proudly including them in their reported statements Today, ESG investing has greatly accelerate market transformation for the better.

Investor’s Role:

Although Investor always focus on maximizing their profits by investing in profit-making entities without much emphasis on Sustainable projects which the companies are really investing their money.

Though few entities are providing good returns to the investors, but many of them are at the cost to the society at large.

Investments in Long-term Unsustainable projects might result in wastage of physical and human resources of the society.

In a nutshell, not only companies, investors are equally liable for the welfare of the society and resources and it is in their hands to choose either to win short term monetary profits or to create long term monetary as well as societal gains.

Do you think ESG Will result in better Compliance by companies along value addition to the society at large??? or is it just another buzz-term. Share your views below!!

[Author : Rahul K. Singh & Priya Singh]