ESG is the acronym for Environmental, Social, and (Corporate) Governance, the three broad categories or areas of interest for what is termed “socially responsible investments”. ESG criteria are a set of standards to evaluate the long-term sustainability and impact of corporatization. In short, ESG is the key of a sustainable future and a driver for corporate and stakeholder value.
ESG investing occurs when the exchange-traded funds or other securities purchased have a positive impact. It is a broad way to guide a investment strategy. It helps assess that investments are sustainable, responsible, and ethical options.
There is a myth that ESG investing occurs in opposition to financial growth. Comparatively, ESG funds typically perform the best long-term. They also experience stable growth and have less risk.
ESG issues are increasingly seen by shareholders as a window into the future. The value of ESG assets under management was approximately $40.5 trillion in 2020. This is a value that has almost tripled in the past eight years. This is because there is more pressure for countries to adopt carbon-neutral practices.
If you are a business leader that wants to learn how socially conscious investing can improve financial performance in the future, keep reading.
Environmental, Social, and (Corporate) Governance (ESG) criteria are a set of standards to evaluate the long-term sustainability and impact of corporatization:
Environmental factors include:
Improving environmental issues improves human health and reduces climate risks.
Reducing pollution helps improve the health of communities therefore improving productivity. It will also reduce medical expenses for governments, while improving wildlife biodiversity. This also improves food supply and resource depletion long-term.
Natural disasters are occurring with increasing force and frequency, manifested in events such us wildfires in California and Australia, flood and hurricanes in the Caribbean and Texas. In the United States, the Federal Emergency Management Agency (FEMA), estimates that responding to climate events such as hurricanes, wildfires, and flooding during 2020 cost $22 billion dollars and represented $95 billion in damages.
Social factors such as:
Companies that promote the improvement in social factors are also likely to have better work relationships and ethos. This will attract higher-skilled employees in the future. Further, employees will be more productive as they feel meaningful contributing to a greater vision.
Moreover, it will reduce turnover costs because employees have a greater sense of loyalty towards these companies. Therefore, they will tend to grow their position inside the company.
Governance factors such as:
By ensuring fair governance, investors can ensure companies are held to industry standards. Therefore, consumers have accurate and transparent information when buying, allowing them to make informed decisions.
Further, investors want to ensure board members do not engage in any illegal or unethical practices. Also, by ensuring board diversity, there is a higher likelihood of innovation and different strategic ideas which will promotive better financial returns.
As climate risk is increasingly seen as investment risk, making ESG issues as a forward looking insight into a company’s performance and a way to manage risk. This is given way to a new form of capitalism increasingly focused on ESG.
In January of 2020, Blackrock CEO Larry Fink warned in his annual letter to CEOs that markets started to price climate risk into the value of securities. Mr. Fink also states that the climate transition presents a historic investment opportunity with a fundamental reallocation of capital.
With public pressure for climate action at an all-time high, every company business model is anticipated to be impacted by the transition to a net-zero carbon emissions economy. This means that it is imperative for businesses to step up climate action in response to the breadth, scale and speed of this transformation.
As society increasingly sees climate change as an existential crisis driving investors capital allocations, businesses need to evolve their approach to corporate sustainability from a one-foot-in-front-of-the-other approach into a pull-every-lever possible approach.
Here is where ESG frameworks, metrics and reporting become extremely important to assess sustainability risks and its impact in the overall business future, and competitive strategy.
We all have a role to play, based on our unique skills, resources, and core competencies. As corporate sustainability evolves from an optional or secondary component of the business’ strategy, into the most fundamental driver of sustainable growth there are rewards for ESG stewards.
Intangibles such as intellectual capital, brand loyalty, and customer loyalty today comprise the majority of corporate valuations. According to the Sustainability Accounting Standards Board (SASB), the percentage of intangibles in a company’s valuation went from 17% to 84% between 1975 and 2015.
Today’s customers, investors, and employees, particularly millennial and gen z employees, want to be associated with companies that take the lead on sustainability and use their muscles and innovation to drive the net-zero transition. Customers also want to be associated and purchase from value-driven organizations.
In short, the benefits of ESG stewardship include:
The call to action is clear: the time is now and we all have a role to play. Be bold and be ambitious, make ESG stewardship your superpower. Ensure to engage your employees and your community, empowering everyone to make an impact.
Whether it is carbon reduction as an employee perk, quantifying carbon footprint, taking climate action or streamlining ESG reporting Quantum New Energy can help. Our cleantech platform, EnerWisely, helps harness unused energy and operational data to optimize energy efficiency, reduce cost and lower carbon emissions.
Contact us to learn more about quick and easy ways to ramp up your ESG Stewardship and Climate action with our data driven, science-based carbon to value solutions.