In the recent past, the emerging trend is that investors are looking at more than just financially sound investments. They are looking for investments that are environmentally, socially, and governance-wise justifiable and overall, sustainable. ESG is set on the principle that the environment is only one factor in determining an organization’s commitment to sustainability. Stakeholders are increasingly becoming interested in how sustainable an organization’s operations are from a wholistic perspective and that includes also the social and governance aspect of wholistic sustainability.
ESG stands for environmental, social, and governance and it is a sustainability model used to screen investments based on corporate policies that encourage companies to act responsibly. The ESG criteria focus on quantitative results that help investors make better decisions about the risks and ethics of particular companies.
ESG analysis has become an increasingly important non-financial part of the investment process. Investors are applying these factors as part of their analysis process to identify material risks and growth opportunities. For investment professionals, a key motivation in the practice of considering environmental, social, and governance (ESG) issues as part of their financial analysis is to gain a fuller understanding of the companies in which they invest. investors are increasingly seeking to associate with organizations that align with their values.
Some of the environmental concerns to note are climate change and carbon emissions, environmental preservation, air and water pollution, deforestation, energy efficiency, and waste management. The environmental criteria includes the energy your organization consumes and the waste it discharges, the resources it needs, and the consequences of such consumption on the ecosystem. Every organization uses energy and resources in one way or another and consequently it affects and is affected by the environment.
The social aspects of an ESG package looks at issues such as fair wages and sound labour practices, diversity and inclusions, human rights consciousness, community/stakeholder engagement and buy-in. The social criteria, addresses the relationships an organization has and the reputation it fosters with people and institutions in the communities where they do business.
Governance on the other focuses on how an organization is led and managed. It draws attention on the internal system of practices, controls, and procedures a company adopts in order to govern itself, make effective decisions, comply with the law, and meet the needs of external stakeholders. Investors and other stakeholders want to understand how an organization’s governance model is aligned with their expectations, how shareholder rights are viewed and honored, and what types of internal controls exist to promote transparency and accountability on the part of leadership.
In the coming years, we will see a massive shift from the traditional non-financial measures like Corporate Social Responsibility (CSR) and Socially Responsible Investing (SRI) to the ESG model which will become an inextricable part of how we do business. The golden thread that pulls through the three criteria in ESG is sustainability. For the sake of our planet’s sustainability, we all need to take the bold step towards sustainable business models that will bring measurable wholistic value.
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