Environmental, Social, and Governance: some background
ESG is an acronym that is becoming increasingly popular among companies, but what does it stand for and why is it considered so important?
ESG stands for Environmental, Social, and Governance and it’s a true indicator of a company’s sustainability that expresses its environmental impact on the market. Such ratings make it possible to assess a company’s efforts from an environmental, social, and governance perspective and to understand how “responsible” it is.
Indeed, it’s important to consider the image and credibility of a company not only from a structural and operational point of view, but also by the level of sensitivity it expresses with respect to current issues. And, it’s equally important for a company to strive to consolidate its image as one that is attentive to these issues, in a world where—thanks to the dense network of digital connections, the dissemination of news, and the exchange of opinions—is increasingly relevant.
Coming into contact with a company that uses ESG criteria can be a win-win: buying and consuming products or services that are based on good standards can help improve the environment, both physical and social, where we live. Here, “doing good to receive good” is the foundation of community choices and actions.
What are the ESG criteria?
- Environmental: These include all choices and actions aimed at maintaining a healthy and balanced relationship with the environment, decisions in food, agribusiness, responsible management of raw materials and water, air, and vegetation resources. Another major goal that companies set for themselves is to try to minimize the damage that can cause climate change, such as CO2 emissions.
- Social: includes all initiatives by a company that have a social impact and contribute most to its positive image. Some of the most important aspects are human rights, both from a civil and labor point of view, optimal working conditions, and the denial of any form of discrimination. In short, all those choices that improve the general welfare of the community are fundamental.
- Governance: covers the policies adopted by a company to promote ethical and transparent engagement; this includes all management and control rules and procedures, and generally the more internal aspects that define a company’s identity.
Why choose ESG criteria?
Companies invest in order to create value: this is the strategy that most of the largest companies have adopted, which allows them to invest over the medium to long term. But what does creating value really mean?
This is perhaps the main goal of every company, and the use of ESG criteria helps support its achievement. Creating value not only indicates increased sales and revenue, but it connects to something deeper and more empathetic: the achievement and sharing of a certain inner richness.
Why would a consumer want to become my customer? What makes us unique? Why not choose someone else? Is it really worth it? These are all questions that a company asks itself on a daily basis in order to best establish its goals, and this is where ESG comes into play.
Today, many consumers no longer make their purchasing choices based solely on classic factors, such as price and quality, but also on ethical and sustainable choices, thanks to which they can feel more satisfied after the purchase. While a large segment of the population still prefers to choose products that are both immediate and disposable, more and more people are paying attention to the environment and the ecosystem where they operate.
ESG criteria make it possible to better understand a company’s moral code and whether it is in line with our own thinking and moral values, so it becomes much easier for a consumer to decide to trust one company over another and thus increase its value.
The choice of these criteria also help the company itself, as it contributes to reducing waste and to a more conscious and balanced management of resources, which bring short-term financial benefits that we cannot underestimate.
ESG rating
But how is a company’s environmental, social, and governance commitment rated? This is managed by specialized rating agencies that provide a brief judgment that attest to the seriousness and stability of any entity in terms of these three key aspects.
The data collected to perform the analysis can come from company documents, public information, data provided by the authorities, but also through inspections carried out by the relevant agency.
ESG: sincere interest or passive adaptation?
More consumers are leaning toward sustainable purchasing choices, and more companies are basing their actions on ESG. But are these corporate initiatives the result of a deep desire for environmental improvement?
According to many scholars, this is a mainstream and almost conventional phenomenon. To maintain or increase their position, businesses will always need to adapt to current situations and try to keep up with buyers’ ideological changes.
Certainly some companies are sincerely interested in the inherent environmental, social, and economic impacts that their businesses have, but it’s also the case that some companies only seem to care about these issues. Such organizations do not fully understand the crucial importance of connecting with the general sentiment in terms of competitiveness and corporate credibility, especially for the future.
An unstoppable path
While some may see an ESG approach as just another attempt to increase a company’s value, the data shows that it’s the opposite: without a doubt, the use of ESG has a positive impact even and especially in the medium to long term.
Research by McKinsey & Company found that using the right ESG strategy can benefit operating profits by up to 60%. McKinsey reports that the magnitude of the investment suggests that ESG is much more than a passing fad or feel-good exercise. In fact, ESG contributes to value creation in five ways:
- Increases profit growth
- Reduces costs
- Reduces regulatory and legal interventions
- Increases employee productivity
- Optimizes investments
We must first make it clear that the actions, and resulting interactions, inherent in the three factors are closely related and interdependent on each other.
Therefore, it is evident that acting on each of these factors has spillover effects and consequences in all areas: investments related to environmental sustainability produce effects on the social quality in which a company operates, as well as improving the internal dynamics of Governance, and vice versa.
Ultimately, investments made in these areas have positive effects in terms of corporate “performance,” not just in purely financial terms but also in terms of the management of internal and external processes. Clearly, the improvement and optimization of economic and human resources also creates a path of cost reduction, increased employee satisfaction, produces a targeted approach on investment operations, and makes minimal corrective interventions to any operational flaws with respect to current legislation.
This whole set of factors improves how the brand is perceived by consumers and/or users, automatically increasing the objective value of the products/services provided.
For example, properly managing energy consumption and waste disposal produces a positive effect on corporate reputation that facilitates entry into new markets, paves the way for an easier relationship with regulatory authorities, and makes it easier to grant permits and authorizations to act in certain areas and situations. In addition, such judicious management significantly reduces energy consumption costs.
Another crucial element is the care and attention to employee satisfaction, in that such a social approach to internal work-life performance produces greater company loyalty that results in higher productivity, both in terms of quantity and quality of work output.
We cannot underestimate the impact of a positive perception of an organization’s value by investors, who see future possibilities for its development by virtue of its capacity for innovation with respect to the dynamics of recurrent social sensibility.
All of these factors, together with others oriented in this light, produce a positive increase in profits for the enterprise, in immediate financial terms and in intangible, but no less decisive terms, such as the overall economic value of the brand.
FAQs on ESG Criteria
- What are ESG criteria? ESG criteria (Environmental, Social, Governance) are standards used to evaluate a company’s sustainable practices in environmental, social, and governance aspects.
- Why are ESG criteria important for companies? ESG criteria help companies improve their reputation, attract investors, reduce operational costs, and increase employee productivity and satisfaction.
- How are ESG criteria evaluated? ESG evaluations are conducted by specialized agencies that analyze company documents, public information, and data from authorities.
- What are the benefits of adopting ESG criteria? Adopting ESG criteria can lead to increased profits, reduced waste, better relations with authorities, and a more positive corporate image.
- Are companies required to follow ESG criteria? It is not a legal obligation, but many companies choose to follow ESG criteria to enhance their competitiveness and meet consumer demands for sustainable practices.
- What does the “Environmental” criterion include? The “Environmental” criterion involves responsible management of natural resources, reducing CO2 emissions, and adopting sustainable practices.
- What does the “Social” criterion include? The “Social” criterion covers respecting human rights, good working conditions, and non-discrimination.
- What does the “Governance” criterion mean? The “Governance” criterion refers to policies for transparency, ethics, and effective management.
- How do ESG criteria influence consumers? ESG criteria help consumers make more informed and ethical purchasing decisions by preferring companies committed to sustainability.
