Environmental, Social, and Governance criteria
ESG stands for environmental, social, and governance concerns or criteria. Every organization and its operations are closely tied to at least one such concern or at least should be. In this blog, we will give a brief introduction to ESG criteria, their benefits, and their pitfalls.
ESG criteria act as a scale or a set of standards to measure a company’s operations and their standing with respect to the environment, society, and its leadership.
Understanding ESG criteria
Think carbon emissions, energy, water, and all things tied to the environment when we talk about ‘E’ in ESG. The resources that a company extracts from the environment, the process, and how it impacts its surroundings – all of it forms part of E.
Similarly, S, or the social criteria, is a company’s operations and stance with respect to the outside world – stakeholders, institutions, customers, et cetera. It also takes into account the reputation a company enjoys.
G – the governance criteria measures a company’s leadership, management, and internal controls, labor relations, and policies, among others.
Why ESG criteria?
ESG criteria are one of the easiest ways to assess a company’s standing by impact investors and help them make a judicious decision. ESG investing is interchangeably known as sustainable investing, or socially responsible investing (SRI). A wide range of behaviors and operations are looked into while measuring a company’s environmental, social, and governance (ESG) criteria.
How does it work?
An organization can be assessed based on the ESG criteria set up by impact investors, for example, an investor may deem it important for an organization to commit to carbon neutrality (E) and have an equal pay policy for all genders (S) besides practicing corporate transparency (G).
Take a look at some of the examples below to understand what all ESG criteria can possibly encompass.
Environmental criteria may require companies to:
- Put a curb on water wastage
- Ensure proper waste management system
- Lower gas emission
- Have a recycling program in place
- Promote green, renewable energy
- Limit pollutants, hazardous chemicals
Under social criteria, a company may be assessed on the basis of:
- Its ethics
- Stance on human, labor rights
- Support to diversity, promoting the ethos of inclusion
- Support for fair wages, women empowerment
- Program to check sexual misconduct
Similarly, a company may be vetted for on the governance criteria based on the following:
- Fairness and transparency
- Inclusivity and diversity
- Ethical workforce, labor policies
Remember, these are just a handful of possible ESG criteria. The criteria are designed after a lot of research and brainstorming so that it meets with the investor’s requirement and does larger good—for the investor, the organization, the society, and the environment.
Benefits and pitfalls
By all means, ESG criteria appear to be a practical tool to assess a company ethically. Companies adhering to ESG standards gain more traction, investment, besides boosting brand image and reputation.
Research points out that ESG criteria link to cash flow in many ways. They:
- facilitate growth,
- reduce costs,
- increase productivity,
- promote innovation,
- attract investment, and
- bump up profits.
Simply put, ESG investing is a step towards a better future—against the ill practices and woes of the world such as climate change, human trafficking, pollution, gender, among others
However, as a flip side, the standards may limit companies from getting investment, even certain industries altogether may fail to meet the standards. On the other hand, investors may lose out on potential return and profit. Then comes the risk of a group of investors placing all their focus on a single sector or industry which may hamper diversification.
One of the biggest challenges in the face of implementing ESG criteria is the issue of uniformity. The lack of uniformity in evaluation and frameworks is a double-edged sword. While the ‘one size fits all’ approach might not be conducive and have many challenges in terms of proper and effective formulation and implementation of ESG criteria, the lack of uniformity also means the comparison and evaluation of different data and reporting difficult.
Robust ESG criteria go a long way in value-creation for both organizations as well as investors and are crucial for the realization and achievement of long-term goals, increasing profits, and bolstering brand image. It can help explore new markets while exhibiting avenues for expanding the existing ones.
Artemis Impact is a network of corporate, donors & non-profits. With our corporate enterprise solution, we aim to empower companies to build human-centered impact stories and create sustainable impact with their CSR programs & core business.