What ESG means to us
What ESG means to us
The right approach to environmental, social and governance values enables (almost) any industry to transition to a better future
It will take radical changes to cope with the climate crisis and mitigate issues of inequality. Unfortunately, these paradigm shifts have deterred many of the industries that could make the biggest contributions towards reducing emissions and improving people’s lives from taking action, time and again.
It’s long been established that we need to do something, anything, to scale down the impact we make on this planet. In Europe many countries are attempting to change the way they power their homes and travel to work. In the United States conversations around climate change are now part of political campaigns rather than associated with an environmental fringe.
Time is running out for those holding on to the fossil fuel dreams of the past 250 years. However, it’s worth acknowledging that we will still need extractive industries to stay in business. Electric cars, smart phones and many other goods we use daily require resources drawn from the earth.
The transition to clean energy is not a smooth path—just consider the complex debate over the sustainability of nuclear power. Nor is it immune to manipulation, as seen with the misuse of the phrase “clean coal.”
However, we’d argue that pursuing environmental, social and governance (ESG) values is the only way to make this transition, and to create a lasting, once-in-a-generation change. (Almost) any firm that establishes an appropriate approach to ESG will be well-positioned to do so.
what it is
ESG’s origins can be traced to a 2005 conference organised by the International Finance Corporation. The event brought together investors, asset managers, analysts and consultants, as well as their civil servant counterparts, to examine the role of environmental, social and governance value drivers in asset management and financial research.
Following this initial event ESG enthusiasm has grown over the last two decades beyond its origins in the finance industry. This has allowed the concept to evolve as every industry sets and approaches their ESG values differently. The environmental goals pursued by a manufacturer will vary vastly from those of a hospital, for example.
What it isn’t
While the idea originated from corporate responsibility schemes it wasn’t necessarily a brilliant new discovery. Many business owners have long known paying competitive wages and taking care of their staff reduces turnover. Likewise, judicial use of resources isn’t just good environmental practice, it’s efficient for one’s bottom line.
To many who see this mindset as quite an obvious and smart approach to business it’s easy to dismiss the ESG concept as jargon and its disclosure as nothing but marketing. With the amount of greenwashing out there some cynicism is to be expected. However, in the era of pandemic recovery and increasing side effects from climate change, now more than ever, everyone needs assurance – and this isn’t limited to clients and customers. A firm’s environmental, social and governance credentials are key to attracting new talent or investment.
making transitions
The combination of improving environmental, social and governance credentials is the only way to enable successful transitions. For example, let’s look at reducing vehicle emissions:
Many countries have set deadlines to phase out internal combustion engines. However, replacing every petrol car on the road with an electric vehicle is not a complete solution:
Particulates in the air from braking cause all sorts of health problems, and the poorest in our communities are far more vulnerable to this form of pollution
Likewise, mining for the minerals for batteries is destroying the environment and communities
Vehicles are heavy and create wear on roads that require repair, generating more emissions
From an ESG perspective this transition could be vastly improved by considering the social impacts:
While phasing out petrol we must be simultaneously creating more walkable neighbourhoods and better public transportation to reduce car journeys and improve air quality
The businesses involved in the extraction and refining of resources to create electric car batteries must pay workers a living wage and ensure their communities are protected from air and water pollution
Factoring in and addressing the environmental and social impacts is the only way we can continue extracting resources from the earth. However, governance plays a key role in enabling this—when profits for shareholders are prioritised over everything else often the other two components are neglected.
the elephant in the room
Our use of petrochemicals and plastics are a huge burden on the earth, but these are often vital for our survival—just consider medical facilities and treatments. While we can and should reduce our personal use of plastics, we will still need these industries, but we need them to operate differently. (In fact, we welcome members of not only petrochemical but also fossil fuel and extractive industries to get in touch if anyone is reading here. We’ve got some great ideas for you.)
Aided by the pandemic, we’ve reached a turning point where profit can no longer be gained at the expense of employee wellbeing. Along with environmental impacts, this is referred to as externalities in economics and have long been neglected when discussing the cost of doing business. In the United States we’ve seen the “Great Resignation” and that should be a warning to companies and employers worldwide.
At the end of the day, it won’t matter what you produce, what service you provide nor any net zero credentials if the culture of your workplace is rotten.
It’s also not enough to simply comply with the regulations and requirements. This is especially prominent in the governance component, especially in places where policy is lagging. The UK currently doesn’t have any regulation on gender diversity in the boardroom. However, a study of France’s 40% quota has shown it is both effective and does not harm the quality of the board.
Simply put, adhering is not truly pursuing ESG values. What community members at ESGmark® share is actually an attitude, and one that must be understood across an entire organisation or company, of striving to go beyond compliance, to build more than profit and to ensure we transition to a future shared by all.
what do you mean by (almost) any company?
Freedom of personal choice is important to us. However, industries like Big Tobacco, for example, have long been proven to rely on addiction to increase profits. A cigarette company, manufacturing a dangerous product, may still rank high for ESG values by some assessments. That doesn’t sit well with us, but with such extreme profitability for the tobacco industry there are certainly ample resources available to drastically improve its ESG credentials. And we would welcome the challenge and opportunity to work with them. We just can’t ensure their role in a better and brighter future.
Many industries will need to make radical changes, but the impacts will benefit far more people. It may seem daunting and this is where ESG values go from strength to strength—the link between good environmental, social and governance practices helps to ensure all three are working. A firm with good environmental and sustainability credentials will attract more candidates when hiring. Transparent and equitable compensation will please employees and shareholders alike. We are truly making a transition where there’s little to lose and so much to gain.
For more on what ESG means, we have further blogs explaining more fully the “G” in ESG, establishing your own ESG policy commitments and why we think this is all so important.