ESG: What Does It Mean and Why Should We Care?

ESG  stands for Environmental, Societal and Governance. ESG is a blanket term for a converging number of standards and practices that align with sustainability. Businesses that incorporate the relevant principles of ESG into their corporate strategy ensure that their working practices align with a unified set of environmental, societal and governance statutes and working practices that will help to both reassure stakeholders and investors alike. ESG provides a clear signal that organisations are taking constructive steps to heal our planet and build a sustainable business that will ultimately benefit everyone.

ESG originally evolved from the SRI Directive ( Socially Responsible Investment) which dealt with moral and ethical issues, and a conference report entitled  ’Who Cares Wins’ in 2005. They were pulled together as a UN initiative by Kofi Annan in 2006 to provide a more holistic approach in making companies more accountable and transparent, while also  helping to save the planet through environmental awareness in a rapidly changing world.

In 2006, 63 companies signed up to ESG, amounting to 6.5 trillion dollars AUM ( Assets under Management), in 2021 there are over 3000? companies with over 80 trillion AUM with further growth expected in 2022. ESG investments have progressed rapidly from peripheral  to mainstream, and its criteria is now used as a leading investment ( and marketing )tool by financial instutions and analysts globally.

In 2022, ESG issues are becoming dominant factors in corporate strategy. Environmentally, there are the tangible impacts of climate change such as the increasing scarcity of natural resources such as water, earth and timber, often caused by extreme weather and rising water levels. These environmental hazards  affect infrastructure ,land loss , and thus subsequent  loss of income to entire communities.

Equally important are the man-made environmental factors, such as polluting emissions from factories and irresponsible waste disposal which have caused irrevocable damage to the biospheres of sea, land and air-and our bodies.

Societal criteria tend to focus on relationships within the labour force, and incorporates the now familiar, Health and Safety standards. Other societal  issues revolve around  responsible recruitment and the implementation of gender and cultural diversity at Board level. There has been evidence of vastly incresed committment to training and conselling resources for Human Capital in both skilled and unskilled labour, as well as salary equality and equal opportunity.

Diversity at Board level, not only opens windows to new markets and innovative products, but enables corporates to predict and capitalise on new opportunities, while it also increases awareness of pending  environmental and societal threats in key geographical regions.

And last but not least, Governance. This focuses mainly on the company’s leadership and management policies, and has a  tangible and positive impact on staff, communities and ultimately, investors.Regulators are actively implementing  new sector –specific directives dealing with organisations’ culture, behavior and values in terms of corporate structure, financial structure as well as  anti-bribery and corruption policies in line with demands from investors and customers for  more transparency and evidence of good ethical practice. This has become increasingly apparent during the COVID crisis with regards to the pharmaceutical industry.

It is clear that ESG is becoming  an integral part of investment decision making and in the 2020s consumers are becoming more and more aware of climate change and substaniability, and the need to see ESG  in action.

Generation Z, those born after 1996, and the Milennials  , those reaching adulthood at the beginning of the 21st century, are increasingly aware of substainability through their schooling and highlighted through social media and the endorsement by high profile activists , while ‘green issues’ are an integral part of the educational syllabus for Generation Z.  Both generations have been brought up with IT and the terrifying ramifications of Climate Change. They are able to to see through the  ‘greenwashing’  marketing ploys on corporate websites, and have the know-how  to persue their own research to substantiate claims and allegiances.

Mercifully, the population at large, are beginning to recognise the benefits of ESG, and stakeholders of the large corporates  and investors are demanding ESG as a key part of corporate strategy. ESG is not yet perfect, but is evolving in the right direction. It varies from sector to sector and is a constantly overlapping and evolving concept, that needs to be adhered to and recognised if we want to avoid the catastrophic effects of climate change and corruption.