ESG from a corporate perspective is an abbreviation for environmental, social and governance. Governance addresses the way corporations are being led. E.g. are the interests of corporate stakeholders aligned with those of management? How is risk management being done? How are executives being remunerated?

What is ESG?

The 3 ESG Dimensions

The environmental dimension considers the way companies’ operations impact the environment. For example, what are companies’ greenhouse gas (GHG) emissions? Do businesses have any hazardous waste?

The social dimension accounts for the impact of business on employees, clients and society in general. E.g. are the products manufactured safe for consumers? Does business support health, safety and well-being of employees? Does business invest in local communities?

In my opinion, the governance dimension is the most important of the three. If the company’s management is weak, then the continuity of business operations can be threatened. Moreover, if the management does not understand two other ESG dimensions (“E” and “S”) or has a lack of interest in ESG, then the company is unlikely to properly incorporate environmental and social risks in its risk management, which may threaten the company’s long-term existence. Lack of ESG understanding by management can also cause the risk of inefficient allocation of companies’ resources to ESG dimensions that are not connected to the core business model. In this case, the ESG strategy will not be effective and will not have a positive material impact on the environment and society. That’s why, effective governance is crucial for proper performance in two other ESG dimensions.

Why is ESG important?

ESG is based on Edward Freeman’s “Stakeholder Theory”, which states that business continuity is only possible if companies consider and balance the interests of their multiple stakeholders (both financial stakeholders, e.g. creditors/shareholders and non-financial stakeholders, e.g. local communities, employees, environmental organizations). Having satisfied the needs of multiple stakeholders, companies are more likely to create strong long-term relations with them, which is crucial for business sustainability.

Given this, ESG is important because companies will only be able to achieve sustainability if they incorporate the needs of their main environmental and social stakeholders into the core business model. But this is only possible if the management of the company is long-term oriented and recognizes the added value of ESG (strong corporate governance exists).

In my next blog, I will tell you more about Sustainable Finance and how this differs from ESG!

Anastasia Kusnetsova
Associate Business Analyst, ESG products

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