Everyone's talking about it, but what is it? This blog will hopefully answer some of your questions.
What is ESG?
The ESG (Environment Social Governance), is an expression widely talked about these days and is based on the concept of sustainability. One of the goals of sustainability is to balance the economy with the planet’s ability to generate resources and keep them available for future generations. Moreover, the premise of sustainability is that economic, environmental, and social aspects interact interdependently without the prominence of one in relation to the others. From the above, the term ESG has been coined by the financial market* and established in the business environment, fundamentally as a means to implement sustainability taking into consideration the risk factors for companies.
The efficiency in implementing strategies related to ESG depends on the resources and capabilities of the company and the industrial environment in which it is involved. It is necessary to consider ESG as part of the generic strategic plan of the company to understand its effects in a specific context and to be able to make decisions that will determine the competitive position of the company. However, the outcome of performance improvement strategies in food waste management will not have the same impact for a restaurant chain as for the petrochemical industry.
The ESG KPIs are selected from a materiality matrix where the main factors that can have a greater impact on the companies' results (single materiality) and on society (double materiality) are exposed. Such analysis is a dynamic process that varies according to the nature of the business, the industrial sector and timespan. For instance, until a few years ago climate change was not considered a risk factor for most companies. However, progress in scientific research has shown that the effects of climate change can have a long-term negative impact on business performance. In addition, there is added pressure from markets and stakeholders, which leads to a different approach and climate change goes from not only impacting society but also interfering with the competitive position of companies.
Beyond minimizing risk, ESG metrics assessment enables companies to be aware of the potential creation of tangible value that is available in specific areas related to ESG. Quantifying the creation of financial potential value by a set of ESG KPIs companies can identify which sustainability strategies generate the most profit and where their resources might be centered. Data can play a critical role in helping companies understand their current sustainability performance and chart a realistic path. Effectively integrating data and analyzing it through technology allows the business to build ESG impact, mitigate risk, and reveal new opportunities.
Analyzing ESG data for the commercial banks sector with a set of eleven ESG KPIs (double materiality checked – SASB & GRI methodology**), we have significant value creation potential for seven of those KPIs, i.e., greenhouse emissions per income, total electricity consumed per income, water consumed per income, digital adoption***, turnover rate, and monetary losses from legal proceedings. The analysis suggests that a bank with a $50 billion income and $1.6 trillion in assets, after performance on those ESG KPIs, could unlock $35.6M additional value in a year (equivalent to 10% of total value potential assessment, in almost all of them).
Being aware of the enormous potential of ESG can help companies make better strategic decisions.
*Ex: Dow Jones Sustainability Index (DJSI) operates since 1999 under a partnership between S&P Dow Jones Indices and Robeco SAM (Sustainable Asset Management).
**The Sustainability Accounting Standards Board (SASB) is an independent non-profit, whose mission is to develop and disseminate sustainability accounting standards that help public corporations disclosure material, decision-useful information to investors. The Global Reporting Initiative (GRI) – is the independent, international organization that helps businesses and other organizations take responsibility for their impacts, by providing them with the global common language to communicate those impacts. GRI provide the world’s most widely used standards for sustainability reporting.
***This KPI has been included as ESG for a specific scenario.
As Co-Founder of ökol, Libertad is helping customers to improve their sales efficiency and get a better use of their strategic resources combining value management concepts with sustainability principles and sustainable strategy development.