ESG (Environmental, Social, Governance)

Overview

• ESG: Stands for Environmental, Social, and Governance.
• Purpose: A framework to measure and quantify an organization's sustainability.

Components of ESG

Environmental (E)

• Focuses on:
  • Greenhouse gas emissions
  • Natural resource management (e.g., fresh water)
• Goal: Understand the organization’s environmental impact and climate risk.

Social (S)

• Examines:
  • Social impact
  • Relationship management with stakeholders
  • Worker wages
  • Community outcomes
  • Accountability in supply chain practices

Governance (G)

• Assesses:
  • How the firm is led and managed
  • Corporate governance quality
• Importance: Healthy governance is crucial as it influences environmental and social progress, and can pose existential threats if mismanaged.

Evolution of ESG

• Origins: Derived from older frameworks like EHS (Environmental Health and Safety) and CSR (Corporate Social Responsibility).
• Difference from CSR:
  • CSR is more philanthropic.
  • ESG views social/environmental issues through business risks and opportunities.

Current ESG Landscape

• Market changes: Rapid shifts in market and non-market conditions.
• Elements:
  • ESG rating agencies
  • ESG scores
  • Mandatory public reporting (ESG disclosure)
  • Sustainability-themed funds and investment strategies