Many companies are increasing their focus on environmental, social and governance (ESG) elements of their business. The logic: 57% of investors in the Asia Pacific (APAC) region expected to have “completely” or “to a large extent” incorporated ESG issues into their investment analysis and decision-making processes at the end of 2021, according to data from investor research firm Morgan Stanley Capital International (opens in a new tab) (MSCI). Furthermore, according to the Global Sustainable Investment Association, global ESG assets are on track to exceed US$53 trillion by 2025, representing more than a third of projected total assets under management. An ESG approach may help get the attention of investors — both institutional and closer to home.
What's more, several sources link ESG to better business performance. In an aggregation of over 2,000 empirical studies, the Journal of Sustainable Finance & Investment found a positive correlation between ESG efforts and corporate performance in 63% of analyses. And the S&P ESG Index has outperformed the S&P 500 over the past year.
For those that want in on the action, this article explains ESG’s components (environmental, social and governance) and dives deeper into the potential opportunities that arise from approaching business through an ESG lens.
Key Takeaways
- Across all industries, you’ll see companies using environmental, social and governance (ESG) considerations in an effort to attract customers and investors.
- These companies each apply ESG principles to their operations differently, based on their specific industry and business setup.
- This article offers an overview of ESG for 2023, along with resources for those looking to explore further.
What Is ESG?
ESG is the environmental, social and governance “criteria that assess the robustness of a company’s governance mechanisms and its ability to effectively manage its environmental and social impacts. Institutional investors, stock exchanges and boards increasingly use sustainability and social responsibility disclosure information to explore the relationship between a company’s management of ESG risk factors and its business performance,” per Gartner(opens in a new tab).
Each component in detail:
Environmental
The environmental component of ESG concerns a company’s impact on the planet. Issues that companies consider in this category include energy and natural resource usage, production and treatment of waste, pollution output and any impact on the environment, plants or animals. Companies that prioritise ESG measure their energy and resource consumption and develop plans to reduce their impact on the environment.
ESG in Action
Industry leaders on carbon emissions
Reducing carbon emissions is a big goal for many companies across industries. For instance, BP plans to reach net-zero carbon emissions from oil and gas production by 2050. Companies such as Amazon and Mercedes-Benz have pledged to reach net-zero carbon emissions by 2040. And Blackstone, the world’s largest alternative investment firm, started a program to reduce carbon emissions by 15% across all investments in which it controls energy usage.
Smaller companies are creating and achieving environmental-related goals, too. Sometimes, it’s through a direct effort, like using energy from renewable resources. Other times, it’s a byproduct of changes in how business is done: For instance, your stay-at-home workforce is using less fuel for commuting while putting in more work hours. And a simple rethink of consumer goods packaging can reduce waste. Sustainable packaging company BioPak, for example, designs and produces eco-friendly, disposable tableware that industrial customers can use and compost — via a BioPak initiative — to reduce carbon emissions and waste. BioPak has also developed a carbon calculator that allows its customers to gauge their environmental footprint, helping businesses such as Qantas and the University of Technology Sydney (UTS) to identify areas where they can further reduce waste.
Social
The second component of ESG, social, examines how companies interact with employees, customers, partners and the communities in which they conduct business. Employee-related considerations include wages, workplace safety and diversity and inclusion (D&I). Socially-minded companies work to understand the social impact they have on the regions in which they manufacture, derive resources or conduct operations.
ESG in Action
Diversity in enterprise and emerging categories
Companies large and small are incorporating ESG’s social component into their operations.
On the enterprise front, Intel addresses diversity and inclusion in its four-pronged ESG strategy(opens in a new tab). The company’s goals include increasing women’s share of technical roles to 40% and doubling the number of women and minorities in leadership. The company is also developing a Global Inclusion Index meant to speed adoption of D&I across the industry, creating a system to track inclusion practices and equipping young people with technology skills.
As an emerging company, your efforts may be more practical and less far-reaching — and that’s okay. A timely way to start is working to fill skills gaps that were a nagging issue for many companies even before the pandemic. Consider using these months to grow the talent your firm might be missing. Smaller companies often work to solve a skills gap by creating a mentorship program that serves underrepresented groups in their area.
Likewise, the supply chains that COVID-19 broke offer a chance to evaluate suppliers in a new light. Assessing them on ESG merits may help you find the ones that will be more responsive and better business partners. Gourmet Australian chocolatier Koko Black partners with the Cocoa Horizons, an independent foundation that works with brands to improve the lives of cocoa farmers, their communities and the environment. Through Cocoa Horizons, Koko Black supports 100% sustainably sourced cocoa by ensuring a carbon-positive, zero-deforestation cocoa supply chain.
Taking another approach, reshoring your suppliers could mean differences in how relationships function and create efficiencies. If you move your supply lines back onshore you may find that some of your potential suppliers are also dedicated to clean energy, diversity and fair living wages. For example, Australian juice business Emma & Tom’s supports local farmers by sourcing fruits from around Australia, such as Kensington Pride mangoes from Far North Queensland, Victorian apples and oranges and stone fruit from South Australia.
Governance
Governance looks at an organisation’s leadership team, executive pay rates, investor relations, financial data availability and more. Governance-related ESG practices aim to develop ethical and transparent governing systems. Some governance controls include anti-money laundering (AML) policies, segregation of duties (SOD) and transparency policies.
ESG in Action
The Bank for International Settlements (BIS) on ESG goals
The Bank for International Settlements (BIS) Innovation Hub Hong Kong Centre and the Hong Kong Monetary Authority (HKMA) collaborated (opens in a new tab) with the technology industry to create a prototype digital infrastructure that allows green investments and improves transparency on how proceeds are used to help meet regional and global environmental and sustainability goals.
Digital exchange platform MetaVerse Green Exchange (MVGX) has developed Carbon Neutrality Token (CNT), a proprietary asset-backed token that enables cross-border trading of high quality voluntary emission reductions without violating the Nationally Determined Contributions (“NDC”) issues. MVGX’s proprietary systems, blockchain technologies and operational procedures provide safeguards to ensure carbon integrity, avoid double counting, and enhance transparency.
For smaller companies, a governance focus can be as simple as actively working to stay on the right side of regulation, being honest and open about how you’ll use customer data and being clear with employees on how you evaluate their performance and work to create opportunities. Ethics in taking on new business and clarity in your financial reporting among company principals and employees goes a long way toward smoothing operations and achieving consistent, predictable growth. For example, the Haribon Foundation in the Philippines was founded in 1972 as a bird-watching society and has since evolved into an environmental non-governmental organisation (NGO) focusing on conserving natural sites and habitats, saving species, encouraging sustainability and empowering Filipinos to become biodiversity champions.
Common ESG Areas of Focus
Companies that desire to get in on the ESG game may choose to focus their efforts in different ways. Here are some of the major areas businesses tackle today:
Supply chain
Prioritisation of efficient supply chains continues to grow. The pandemic exposed weaknesses, like lack of transparency and poor compliance structures, in supply chains worldwide. Strategies to fortify supply chains as part of a broader ESG plan include:
- Closely tracking supply chains for ESG reporting requirements
- Reducing a supply chain’s impact on the climate and environment
- Assuring supply chain partners’ compliance with human rights and fair labour practices
- Balancing supply chain efficiency with resilience
- Establishing a clear and transparent chain of custody for production inputs
Disclosures
Company disclosure on ESG factors will be a key area of progression, says PwC. According to McKinsey (opens in a new tab), there is a trend toward consolidation of ESG reporting and disclosure frameworks as well as more active regulation. Companies looking to meet modern ESG standards will need to prepare disclosures that speak to a variety of stakeholders, including employees, customers, partners and regulatory agencies. These disclosures broaden the scope of material information for investors to digest and use in making their decisions.
Carbon emissions
Driven by research on climate change and governmental sanctions around carbon emissions, companies are increasingly building plans to measure, establish targets for and reduce greenhouse gas emissions and setting goals to reach net-zero carbon emissions. Even sectors that contribute heavily to carbon emissions, such as fossil fuels, transportation and agriculture, are shifting toward more energy-efficient operations, renewable energy sources and more.
ESG in Action
Australian regulator pushes climate risk management
The Australian Prudential Regulation Authority (APRA) released CPG 229 Climate Change (opens in a new tab) Financial Risks Guide affecting banks, insurers and superannuation trustees. Whilst the guide did not press new climate risk requirements, this was only the case because APRA’s existing risk management and governance requirements should result in the consideration and management of climate risks. APRA has also undertaken a Climate Vulnerability Assessment (CVA) of Australian banks, with results to be released in 2022, and has said it will consider extending the CVA across the insurance and superannuation sectors.
Singapore’s central bank, the Monetary Authority of Singapore (MAS), has introduced disclosure and reporting requirements for ESG funds, announcing new guidelines (opens in a new tab) which will enter into force on 1 January 2023. Under the rules, ESG funds will be required to disclose information on an ongoing basis, and investors will receive yearly updates on the progress of the ESG goals that the funds have specifically set. Information provided can include their investment focus, strategies, criteria and metrics used in selecting investments, asset allocation, and the risks and limitations associated with their strategies. Funds must also allocate at least two thirds of net assets for sustainability investments as per their stated strategies. Funds must also ensure that the name they adopt is not misleading, and if they use ESG related terms such as “sustainable”, this should be substantially reflected in their portfolio.
Opportunities Linked to an ESG Approach
Retention and job satisfaction
ESG has been shown to help companies attract and retain quality employees, enhance employee motivation by instilling a sense of purpose, resulting in higher levels of productivity, according to research from McKinsey (opens in a new tab). The research also showed that positive social impact correlates with higher job satisfaction, and employees react with enthusiasm when companies “give back”.
Access to capital
Many now consider ESG a standard tool for financial analysis, alongside traditional financial metrics.
“We believe that sustainability should be our new standard for investing,” said BlackRock, the largest institutional investor in the world, in a 2020 letter to clients.
In addition, ESG index funds (opens in a new tab) are outperforming their classic, non-ESG-aligned counterparts. This fast-growing investment segment saw record inflows of cash this year. It accounts for US$250 billion worldwide. In Australia, there was AU$30 billion invested (opens in a new tab) in impact investments in 2021 – over five times what it was in 2017.
ESG Resources
For those interested in taking an ESG approach, there are several expert-vetted frameworks and reporting tools with which to assess and share your ESG performance:
The World Bank: Environmental and Social Framework
The Environment and Social Framework is a methodology the World Bank and its borrowers use to identify risks and offer business recommendations on environmental and social issues. The ESF is composed of resources such as the World Bank’s Vision for Sustainable Development, Environment and Social Policy for Investment Project Financing(opens in a new tab) and Environmental and Social Standards (ESS)(opens in a new tab). The ESS cover topics including environmental and social risk mitigation, appropriate land use, community health and safety and natural resource management.
United Nations: SDGs and Guiding Principles on Business and Human Rights
These two resources offer a high-level overview of major ESG focus areas. At the heart of the United Nations’ 2030 Agenda are 17 sustainable development goals (SDGs)(opens in a new tab) that cover many of the world's most pressing developmental issues, including climate change, poverty, clean energy and responsible production. Meanwhile, the U.N.’s Guiding Principles on Business and Human Rights(opens in a new tab) lay a framework for the role businesses and corporations may choose to take in protecting human rights.
B Lab: Impact Assessment
B Lab is the creator of the B Corp status, a designation granted to companies with high ESG performance and standards. The free B Impact Assessment(opens in a new tab) tool allows companies to assess their performance on ESG metrics, compare results to similar companies and get a customised improvement plan. Becoming a certified B Corp is a signal to investors that your company is serious about its ESG efforts, which can by itself open new investment opportunities: Before ESG considerations, corporations existed to bring advancement to their shareholders, usually in the form of a monetary return on their investment. In a B Corp, consideration is given to the betterment of stakeholders — which can include customers, employees and communities in which the company operates.
GRI: GRI Standards
The Global Reporting Initiative (GRI) helps organisations assess their environmental, social and societal impact worldwide through access to resources and standardised reporting methods. Organisations can use the GRI Standards(opens in a new tab) to develop, organise and share material issues, highlight progress and display corrective actions.
SASB: Standards and Materiality Map
The Sustainability Accounting Standards Board (SASB) provides resources and tools to businesses and investors regarding ESG standards, reporting methods and major focus areas on an international scale. SASB standards(opens in a new tab) comprise a list of 77 financially material sustainability standards and common reporting metrics, while the SASB Materiality Map(opens in a new tab) offers a graphical representation of these standards broken down by sector. The Map guides organisations toward understanding the primary issues facing their industry and which ESG metrics are top-of-mind for investors.
Financial Stability Board: Recommendations for Climate-Related Financial Disclosures
The Financial Stability Board created its Task Force on Climate-Related Financial Disclosures to increase reporting on and resources related to the relationship between the climate and global financial markets. The Task Force provides a list of recommendations for climate-related disclosures(opens in a new tab) and implementation recommendations(opens in a new tab) for general and industry-specific guidance.
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The Bottom Line
ESG is no longer a buzzword that only applies to a small percentage of the world's largest companies. Today, it’s a common business approach fuelled by growing popularity among consumers and investors. For those intrigued by the potential, ESG resources can help them explore further.
