The term “ESG” has become a buzzword in every sector, from banking to manufacturing. In March 2022, the European Securities and Markets Authority (ESMA) called for the rapid establishment of ESG rating, a move that comes hot on the heels of the EU's new Taxonomy legislation passed in 2020. These are only a few of the raft of policies, legislation, actions, and propositions that target to promote sustainability, but to get the perfect picture, we have to go back to the basics and ask the big question, "what does ESG stand for?"
This post digs deeper into the concept of ESG to extrapolate what it stands for, reporting, and benefits for your company. We will also tell you why you need to have the right ESG sustainability reporting software for your company.
What Does ESG Stand For?
As more parties, from consumers to investors, continue calling for responsible business operations, sustainability is shifting from being a voluntary concept into a mandatory undertaking. So, whether you run a hospitality enterprise or an insurance organization, understanding what ESG and ESG reporting will be central to its success.
ESG stands for environmental, social, and governance: three core areas that encompass a distinct set of criteria but work together to show a company's dedication to helping improve the planet. Here is a closer look at each criterion/ pillar.
Environmental Pillar/ Criteria
The environmental pillar is founded on the commitment to help protect the environment by cutting down risks and measuring the impacts of your activities. The notion of environment must be looked at broadly to ensure that your enterprise is helping to address the global issues. Here are some of the areas that you can focus on in the environment.
- Saving and preserving natural resources.
- Cutting down and managing waste.
- Calculating carbon footprint and reducing your company’s greenhouse (GHG) gas emissions.
- Reducing water consumption in your company.
It is essential to set clear goals on how to improve the environment by creating a clear plan for it.
For example, what strategies do you adopt to cut down greenhouse (GHG) emissions?
Social Pillar / Criteria
The social pillar of a business's sustainable development is all about focusing on and upholding values that advance fairness and respect for human rights. This means that you focus on promoting respect and fairness not just in your company but also in the neighborhood and the entire planet. The principles upon which the social pillar, or “S” in ESG is anchored on are:
- Fighting Social Exclusion and Discrimination: This implies that your company helps to support gender equality, reintegration, reducing gender gap pay, and applying global social rights.
- Promoting Social Justice and Solidarity: This includes helping to cut down social inequality by working with both local and international associations, prioritizing fair trade practices, and supporting initiatives that create policies for social justice.
- Improving the well-being of stakeholders: As we indicated earlier, ESG in your company should be manifested in your organization and extended to the rest of society. Therefore, you need to ensure that stakeholders, including your employees, operate in an environment that delivers value and joy.
Then, extend the focus on transparency, support for career growth, and respect for the rule of law to other stakeholders. For example, you might want to insist on working only with companies that have strict ESG policies that include support for human rights and equality.
Governance Pillar/ Criteria
This pillar is built on the focus to create and use a responsible and sustainable economic and leadership system. Your company has to adopt accurate and transparent methods of accounting, pursue integrity and diversity in its leadership. For example, is there gender equality in the board constitution of your company? Are the financial reports presented accurately for investors to understand the position of the enterprise on the market?
When investors are evaluating your company’s stock, they want to know the governance model to be sure there will be no conflict of interest when selecting members of boards or senior executives.
They also want to be sure that the company has clear plans for leadership succession to guarantee long-term profitability.
Other aspects of governance criteria include:
- Internal controls and their application.
- Tax compliance for your company.
- Focus on avoiding corruption and addressing cybersecurity.
- Emphasis on shareholder rights.
ESG Sustainability Reporting
For some managers, leaders and entrepreneurs, getting the answers to the main question, "what does ESG stand for?" is enough to get started. Next, you need to appreciate that ESG comes with a lot of benefits, especially for your company, but also for investing parties and the globe. Here are some of them:
- Improved Regulatory Compliance
One notable thing about the environmental, social, and governance (ESG) concept is that it helps companies to rally way above the current regulations in most countries. This is important because regulatory compliance will automatically fall into place when you focus on improving ESG performance.
Take the example of cutting down emissions, which is a pretty common ESG target. With actions such as shifting to renewable energy and sustainable raw materials, meeting the set targets for permits or license renewal will be pretty easy.
- Lower Operating Costs
When your company improves its ESG performance, the cost of operations will also come down significantly. In one of the studies done by McKinsey, the findings showed that ESG could impact operating profits of companies by as much as 60%.
ESG can pull down the operating costs in a number of ways, such as reducing the energy costs, raw material usage, and eliminating waste. ESG also helps to cut down the cost of maintenance by adopting new technology and extending the lifespan of the equipment. Why direct more funds to company operations when ESG has a way of keeping the cost low.
- Enhances Long Term Planning
To achieve ESG targets, the process has to start with an assessment of a company's operations. This offers your organization an opportunity to identify areas that are lacking and craft strategies for improvement. If your company is performing poorly because of inefficiency in the production floor, ESG strategies such as shifting to more efficient machinery, human resources development, and eco-friendly energy, can help to address the challenge.
ESG Reporting and Need for the Right Software
The benefits that we have outlined above are only a scratch on the surface. You are sure to enjoy a lot more by focusing on ESG sustainability, but there is one more thing: reporting the efforts. ESG sustainability reporting is the disclosure of your company's operations in the three core areas: environmental, social and governance. It culminates with the creation of an ESG report that stakeholders can read and appreciate the efforts.
Reporting can be pretty complex because it requires a clear focus on all areas of ESG, following key performance indicators, and sticking to the selected framework, such as the Taskforce for Climate-related Financial Disclosures (TCFD) or Global Reporting Initiative (GRI). More importantly, it requires accurate data gathering and analysis, which can only be possible when working with the right ESG sustainability reporting software.
Remember that all of these must be done with the parties targeting your company, maybe, corporate investment or customers, in mind.
Diginex.com is a globally respected brand on matters of ESG, and you can count on us to help you get the process of sustainability reporting right. We have the expertise and the right ESG sustainability apps that will not just make the process easy, but accurate and reliable.
Talk to our experts today to learn more including expounding on “What does ESG stand for?”