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Socially conscious investors and consumers use environmental, social, and governance or the ‘ESG’ criteria to assess the social responsibility of a business before dealing with it. Notably, the criteria have gained significant traction in the past few years. Likewise, investors and consumers consider this alongside traditional financial analysis models to assess businesses. This article discusses the ESG criteria in detail and provides six reasons why your businesses should aim for high ESG performance.  

A Closer Look at the ESG Criteria 

The ESG criteria help assess a business’ sustainability and viability in a way that cannot be understood from pure financial analysis. It involves assessing, among others: 

  • a business’ carbon footprint;
  • steps a business takes to address climate change;
  • labour practices in the business; 
  • the business’ engagement with the community and other stakeholders; and 
  • the operations of the business’ suppliers and contracts. 

Traditionally, companies do not include an assessment of these areas in their financial reports. However, many argue that looking at a business through the ESG lens provides a more wholesome view of its longevity and future financial performance.  

Rise of the ESG Criteria 

Additionally, the rise of the ESG criteria aligns with the rise of socially conscious investors and consumers. Those investors want their investment to lead to good financial returns and do good in the world. At the very least, refrain from doing any harm. On the other hand, the consumers want to be sure that the businesses they buy from are socially responsible. So, businesses see the benefit of a business model that is socially and environmentally aware and appropriately governed in addition to having a good core business and pricing.

Corporate Social Responsibility: Precursor to the ESG Criteria

The precursor to the ESG criteria was corporate social responsibility (CSR). CSR is a business model where a business takes positive steps to address its economic, social, and environmental impacts. To this effect, the business may implement programs like a ‘volunteer day’ for the staff, form community partnership programs and engage in charitable activities. Although this may look similar to ESG, the ESG criteria are distinguishable. Indeed, it looks more closely at the core of the business to assess whether they are socially responsible. 

Additionally, CSR receives criticism for not being quantifiable. Businesses can adopt CSR models in many ways, but it is hard to compare them. ESG criteria, on the other hand, can be employed to assess a business in a quantifiable manner and then use the results to compare businesses. 

Elements of the ESG Criteria: Environment, Social and Governance

The ESG criteria assess a business through three broad lenses: environment, social and governance. Let us look at each more closely:

Environment: First, the environment criteria assess a business’ contribution to the environment – both positive and negative. For example, it looks at a business’ carbon footprint, energy sources, and environmental risks the business faces and those it presents.

Social: Next, the social criteria broadly assess a business’ societal impacts. It includes considerations like:

  • the business’ relationship with stakeholders like its employees, suppliers, contractors, and the community;
  • the workplace culture of the business;
  • the way the business treats its employees;
  • its policies around employee wellbeing;
  • the health and safety of the employees, 
  • the business operations of the suppliers and the contractors;
  • the business’ human rights standing; and 
  • approach to privacy and data protection.

Governance: Finally, the governance criteria deals with the management and governance of the business. Importantly, the conduct of the business’ leadership is essential here. For example: 

  • remuneration of the directors of the business compared to its employees;
  • diversity in the business’ leadership; 
  • internal measures and controls to prevent lousy governance;
  • treatment of bullying and harassment claims, whistle-blowers; and 
  • general engagement with public officials. 

Six Reasons Why Your Business Should Care

  1. Investors and consumers recognise that a business’ environmental, social and governance can have financial implications and affect the business’ longevity. Therefore, investors use ESG performance when contemplating investing in a company;
  2. companies with high ESG performance attract a lot of capital;
  3. companies with high ESG performance tend to have access to cheaper financing options;
  4. high ESG performance is good for marketing;
  5. consumers prefer to buy from socially conscious businesses; and
  6. most importantly: it is fulfilling to be a good corporate citizen and be a positive force in the market. 

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Key Takeaways

The ESG criteria, like its precursors, have found traction among socially responsible investors and consumers. But ESG goes beyond its precursors. The ESG criteria investigate the core of business practices to assess whether it is environmentally conscious, improve societal conditions and is governed appropriately. Likewise, it uses non-financial data to draw a picture of the business that supplements the traditional financial analysis. 

If you need help with your ESG performance, our experienced lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What’s the difference between ESG and corporate social responsibility?

The precursor to the ESG criteria was corporate social responsibility (CSR). CSR is a business model where a business takes positive steps to address its economic, social, and environmental impacts. Conversely, ESG looks more closely at the core of the business to assess whether they are socially responsible. 

Why are investors interested in a business’ ESG performance?

Investors and consumers recognise that a business’ environmental, social and governance can have financial implications and affect the business’ longevity. Therefore, investors use ESG performance when contemplating investing in a company. 

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