Understanding ESG

What is ESG?

The non-financial factors which are part of analysing a company are collectively known as ESG and refer to Environmental, social, and governance (ESG) criteria which form a set of standards for a company’s operations that socially conscious investors use to screen potential investments.

What constitutes ESG?

ESG cover the following details :

Environmental criteria – how the company performs as a steward of nature

Social criteria – how it manages relationships with employees, suppliers, customers, and the communities where it operates.

Governance – about a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

How ESG is measured?

An ESG score is calculated based on how an organisation is seen to be performing – that is, how its behaviour relating to ESG issues is reported. Just as with the building of corporate reputation, there is a gap between reality and perception

Why is ESG important?

  • Increasing global regulations regarding corporate ESG data reporting.
  • Companies doing ESG reporting are perceived to be proactive and future-focused and understand the importance of communicating ESG criteria in their business strategy and purpose. 
  • Companies with strong ESG performance have demonstrated higher returns on their investments, lower risks and better resiliency during a crisis.
  • ESG transparency will be a key focus for companies in 2021 and beyond. Investors are increasingly considering ESG issues to help manage investment risks.   
  • ESG performance improvements and reports show investors how a company mitigates risks and generates sustainable long-term financial returns.

Who is target for ESG?

Typically, investors who look at a lot of factors to evaluate a company – financial as well as others- to identify material risks and growth opportunities. Others would include future employees and general public to a limited extent.

Non reporting ESG

On the other hand, companies that do not provide these reports show a lack of transparency and concerned investors may overlook them as potential investments.

Challenges in ESG

While the demand and practice of ESG reporting have increased, there still lies a considerable knowledge gap between ESG information and supply. This gap is driven by several factors like varying ESG reporting standards and frameworks, nonmandatory reporting regimes, and steep costs to collect and report data. These can hamper the efforts to offer higher-quality data to investors to inform their decisions. Fortunately, companies can work with experts to develop and incorporate ESG balanced strategies into their overall performance.

How to report ESG

  • Internal team to create a reporting framework that includes ESG issues, targets, initiatives, performance metrics, internal and external reporting standards.
  • Periodic materiality assessment and gauge relative importance of sustainability issues for stakeholders.
  • ESG solutions experts to provide real-time data to map ESG needs and the resources and insights to meet reporting needs that comply with stakeholders, industry and non-profit standards.
  • Effective communication to showcase ESG management framework and reporting for external and internal stakeholders.
  • Reporting ESG performance and its alignment with your business strategy.
  • Continuous work and improve ESG performance by engaging stakeholders and understanding emerging sustainability issues affecting business.

ESG vs Sustainability

ESG and sustainability, though used interchangeably when it comes to benchmarking and disclosing data, differ from each other.

Sustainability is an umbrella term for many green concepts and corporate responsibility while ESG is the preferred term for investors and the capital markets. The industry started with sustainability efforts, but evolved to include ESG practices, performance, reporting and relevance to capital opportunities. ESG data helps identify risk-adjusted returns and emphasis on all three pillars has aided the shift in how companies measure and disclose their performance.

ESG- snapshot

  • ESG reporting and disclosures help companies get access to capital markets and secure their license to operate.
  • Strong ESG performance leads to preferential treatment from investors compared to companies whose environmental or other practices may pose a greater financial risk.
  • Robust sustainability and ESG strategies increase business resilience and help improve overall company performance.
  • With expert help, businesses can efficiently navigate through the ESG world. Integrated data and software services include ESG analysis and ESG ratings into overall organizational performance.

Syne is an ideal partner for ESG consulting as it provides expert support along with relevant on ground data collected from worldwide.

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