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Environmental, Social, and Governance (ESG)

What Does Environmental, Social, and Governance (ESG) Mean?

Environmental, Social, and Governance (ESG) is a concept meant to capture the non-financial value created by corporations. ESG focuses on corporate activity, policies, and programs that promote environmental sustainability, support social causes, and cater to the needs of stakeholders, including the company's employees.

The Environmental, Social, and Governance performance of corporations are a concern for governmental agencies, non-profit organizations, and investors.

Safeopedia Explains Environmental, Social, and Governance (ESG)

The basic function of a corporation is often understood in terms of its operational goals and financial performance. Environmental, Social, and Governance is a concept that encourages companies to look beyond these immediate aims and consider their broader impact on the world.

Although ESG was only coined in a 2005 conference devoted to the impact of these factors, the broader idea has earlier origins. Most notably, the rise of corporate social responsibility (CSR) in the 1970s.

How ESG Reporting Works

In most cases, ESG reporting is voluntary. Organizatios are, moreover, able to select what they measure and include in their ESG reports. This selection is based on various considerations, such as:

  • Industry expectations
  • Organizational values
  • The quality and quantity of available data
  • Consumer pressure or demand
  • Guidelines set out by other organizations, such as the UN's Sustainable Development Goals (SDG)

Some of the factors assessed in ESG reports can include:

  • Enviromental
    • Use of environmentally hazardous materials
    • Runoff, spills, and other forms of water pollution
    • Greenhouse gas emissions
    • Sustainability programs
  • Social
    • Promoting diversity
    • Supporting social causes
    • Consumer protection
  • Governance
    • Inclusive workplace policies
    • Fair compensation for workers
    • Following best practices for hiring and onboarding
    • Corporate transparrency

There is currently no concrete legislation enfocring mandatory ESG reporting, with a few exceptions:

ESG and Responsible Investing

ESG factors are a central concerns for the responsible investing movement.

Investors who weigh ESG as part of their investing decision might do so for ethical reasons or as a prudent investment strategy, since corporations with poor ESG performance are more likely to come under regulatory scrutiny, tarnish their reputation, have a negative public perception, or become subject to boycots.

These investment risk factors have intensified under greater regulatory pressure, increased environmental regulations, social and demographic shifts, a growth in concerns about privacy, and the worsening state of climate change.

ESG in the Workplace

Employees are one of the most critical stakeholders affected by a company's ESG performance. According to key findings from Morgan Stanley Capital Internationals (MSCIs) ESG data, there is a close connection between ESG performance and workforce sentiment:

  • A company with a good ESG performance will improve the job satisfaction of its employees
  • Employees who are happy with their jobs work harder, are more loyal to their employer, and demonstrate greater performance and productivity
  • ESG will become increasingly important to attract and retain talent
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