ESG stands for environmental, social, and governance, this framework aims to analyze how companies manage risks and opportunities that shifting market and no market conditions create, and this includes changes in the economic, environmental and social system. This new discipline’s purpose is to measure a company’s ability to create and maintain long-term value for all stakeholders, not just the company’s shareholders.
The three different sections focus on specific areas of work, such as:
- The Environment part aims to identify and manage business operations that impact the planet to minimize negative externalities;
- The Social part focuses on how the company manages relationships and creates value for stakeholders;
- The Governance part focuses on the leadership and management philosophy of the enterprise, and how directors manage E and S strategies to implement a sustainable level of management.
In a more practical way, here are some examples of ESG problems:
Environment: water management, energy management, CO2 emission management, waste management.
Social: worker management, engagement with communities, social sales, and advertising practices.
Governance: transparency and completeness of corporate ESG data, DEI: diversity, equality, and corporate and worker inclusion, management of environmental and social impact in the network of suppliers and retailers, environmental risk management.
Nowadays, ESG discipline is still developing and there is not a one-fit-all approach. Even if it will be great to develop a process that could be applied to every entity, which will be able to calculate how sustainable a business is. This sustainable “accounting” system is not accomplished yet, as ESG reporting needs to focus on the materiality issues every single firm is facing, and this calculation is difficult to do with a standardized process.
However, to benchmark and control the ESG‘s business efforts there are rating agencies and international frameworks that enable investors and the public to get this sustainable information. Rating agencies are the ones that developed a standard process that they use to evaluate businesses. In this scenario, it is important that, while reading reports, the audience will look at them whit critical eyes. In fact, rating results are the summary of qualitative and quantitative data which should be taken as a background basis to judge the final rating results. This process of measuring is yet to be perfect, but it is one of the most reliable sources of ESG performances.
On the other hand, firms can create personalized reports using international frameworks to assess how they perform in ESG disciplines. Globally, there are relevant frameworks that differ for the characteristics and their purpose. Between them we can mention the SASB, the sustainability standard board, this is one of the most important investor-facing ESG reporting frameworks which aim to analyze the industry-specific ESG issues that each business can encounter. On the other hand, one of the most famous public-facing ESG reporting frameworks is the UN Sustainable Development Goals, which consist in showing how businesses align and contribute to reaching these goals.
To summarize, ESG reporting is one of the steps businesses can do to start being more sustainable. In this process, they will identify the risks and the chances of improving, and they can have the possibility to implement them while changing the value inside the corporate culture to transit into this new green era.