Environmental, Social, and Governance (ESG)
Written By:- Sreshta Satpathy
What is ESG?
ESG stands for Environmental, Social, and Governance. It is said to be the three central factors that measure the sustainability and societal impact of an investment in any company or organization. The first criteria ‘environmental’ considers the performers of a company as a steward of nature. For example, if there are issues related to the ownership of contaminated land, its disposal of hazardous waste, or its compliance with government environmental regulations, etc. The social criteria examine the way the company handling relationships with employees, suppliers, customers, and the communities where it operates. For example, do the company’s working conditions show high regard for its employees’ health and safety? etc. Governance (G) criteria deal with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
The growing importance of ESG
Environmental, social, and governance (ESG) considerations have been growing at an increasingly important stage in investing. In addition to prioritizing environmental sustainability, investors are using metrics on effective governance, community impact, and many related factors to evaluate certain properties. For many companies, an ESG policy is a roadmap for becoming a responsible corporate decision-maker and respecting the planet and its people.
As global interest rises in ethical investment it grows rapidly, these factors tend to have increasing financial relevance. There are many dedicated ESG professionals and many more who recognize the importance and benefits of ESG to gain a more meaningful and better understanding of corporate policy management and strategy.
ESG here makes a mark by identifying and quantifying risks that are overlooked by traditional financial metrics, such as the amount of impact on the environment by the company, its use of employee diversity. Companies with sound policies are more sustainable and can be managed better. During recent times, ESG accounts for around a quarter of all professionally managed funds around the globe.
One of the major barriers to successful investment has to be a lack of quality, impartial data, but that’s changing rapidly this The Companies Act, 2013 promotes the S of ESG (social responsibility part of ESG) by including provisions helpful for corporate social responsibility activities to be performed by all the companies. From time to time investors have matured to see corporate social responsibility activities undertaken by the company as more beneficial as well as more than just a mere obligation under the law.
A company which is said to have policies regarding strong corporate social responsibility indicate to the investor a high-standard risk management team which recognizes non- financial factors such as reputation, environment efficiency and social license to operate and contribute to a company’s assessment .
Contribution of ESG towards better Corporate Governance
Focusing the emphasis on good governance, particularly since this has proven to yield better corporate returns, cannot be played with. The importance that is given to corporate governance by investors to expect from a company exhibiting robust corporate governance practices generate significantly higher returns when compared to companies that exhibit poor corporate governance is. Rightly while with the fall of some of the largest corporations in India like Kingfisher and very recently, Yes Bank has been credited to have governance failures. There is a better focus on environmental, social and governance (ESG) investments especially across Asia.
The increasing internet infiltration over these recent years and India digitizing faster than the other emerging economies 4 , people are environmentally and socially more aware and informed and driven to actively pursue the changes due to ESG. Investors are now looking at the environmental (E) and social (S) factors in addition to the governance factors.
When it comes to the part of governance, investors may want to know about matters that company uses which should be accurate and transparent. They may also sometimes want assurances that companies avoid conflicts of interests in their choice of members, don’t use political contributions to obtain unduly favourable treatment and, of course, don’t engage in illegal practices.
As we read, the potential impact of the inclusion of the ESG environment, social and governance criteria in the investment decision-making process is the crux of the issue. This is equally as important for policymakers, investors and the managers who are already involved in the investment decision-making process as the persons involved in the investment process want to do good while doing well for the company.
ESG criteria can help and provide valuable insights into any possible current and future environmental, social risks and opportunities for corporate bodies, given the impact and dependence those corporate bodies have on the environment and society. The investment community has rapidly recognized the high importance of good corporate governance, also the environmental and social considerations.
Although practices concerning corporate governance (and ESG overall) will undoubtedly continue to evolve with time, investment analysts who have a good understanding of these concepts only can be the ones to better appreciate the implications of ESG considerations in investment decision making.
After knowing the pros and cons of any matter, in this case ESG and after making policies regarding the same, it becomes easier for a company to survive any upcoming situation be it any field.