Evaluating ESG Criteria
Have you ever wondered what matters to you the most?
What is ESG?
Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments.
- Environmental criteria consider how a company performs as a steward of nature.
- Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates.
- Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
Have you personally given any thoughts to which criteria you feel the need to be assessed? I have.
Impact of release & consumption of Greenhouse Gases (GHG)
The GHG emissions under the Kyoto climate change agreement are carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6). These GHG emissions are consistently on record high in the last few years.
A majority of businesses have been slow to act on reducing greenhouse gas emissions that warm the atmosphere and contribute to climate change and now those need to make serious commitments to address their actions — Oil & Gas companies need to focus on Clean energy; Auto Manufacturers need to focus on electric vehicles & improve efficiency on manufacturing; Financial sector needs to enable financing of Green energy solutions — among some to be mentioned.
Long-term sustainability should be our main target to achieve in terms of reducing the carbon footprint for example. Regulations need to be stricter & fines should be imperative to tackle business tactics who try to jump illegal environmental activities
Waste, Pollution & Toxicity — A major end-product of running a Business
Some questions we all need to consider —
- Where does the water consumed for waste reduction come from? (Groundwater, Desalinisation, etc.)
- Has the company consulted long-term waste management strategies that take into account deadly pollution?
- What efforts has the client made to reduce the water footprint of its facilities?
- Has a common household thought about the ill-effects of a waste generation & its management? Waste generation & pollution generated are serious issues that need the highest standards of ESG practices.
We have reached a point where there are no more questions regarding the advantages of recycling & responsible waste management, mineral extraction
What we need now is to save space in a landfill, implement recycling to reduce the chances of air pollution and water contamination.
If businesses don’t dispose-off waste properly and landfills are overused, toxic gasses and chemicals can seep into air and water. Separating and recycling your waste can help prevent this from happening, as well as keep your community safe from infectious disease.
Also, we need to reduce the number of natural resources consumed, confirm that any materials that are taken from nature are reused as many times as possible and that the waste created is kept to a minimum.
Potential fines need to be charged for non-compliance with the prevention and treatment of waste and pollution, including hazardous waste and air pollution.
Labour management & truthful implication of labor laws
Labour laws are not a modern concept, but many fail to understand the necessity of their existence. The relationship a business has & the reputation it cultivates with people and communities’ matter; Yes, it does.
Unfair labor practices (Unequal pay, dangerous working conditions) and Gender inequality creating a “social stigma”, restricts talent that can be accessed.
The recent situation has led to the abolishment of labor laws in certain states of India citing “economic distress” as an explanation. Pakistan & Bangladesh overlook the fact that child labor is still a reality that needs to be addressed in a well-functioning economy. This is inhumane.
What we need to focus is — Our capacity to develop a long-lasting productive workforce while at the same time reducing potential operational disruptions from workforce mismanagement; diversity and inclusion attributes; exposure to strikes and our general exposure to dealing with emerging skills scarcity or surplus labor
Institutions & Companies should contribute to the development of these standards for evaluating the most pressing labor and other human rights challenges they face.
For example, the London Business School’s Alex Edmans found that the companies that made Fortune’s “100 Best Companies to Work For” list generated 2.3 percent to 3.8 percent higher stock returns per year than their peers over a greater than 25-year horizon
Transparency in governance structure & actions to properly regulate the above-mentioned criteria and more
The fall of Lehman Brothers, Wells Fargo’s scam of fake accounts, & Adani enterprises facing severe environmental criticism for its approach to business in Australia are some examples of why a business needs to be transparent in its fields.
What we need to focus is on how an Institution is both accurate and transparent and that its practices are ethical.
Investors want to know the policies that are implemented need to encourage shareholder/stakeholder engagement and the investment to be both accountable and diverse.
WHY IS THERE A NEED FOR ESG EVALUATION? ARE INVESTORS AWARE OF ACTIVITIES THAT CONCERN ESG?
- Every company needs to determine which environmental, social, and/or governance factors are most directly relevant to its business, including consideration of such issues that may pose a risk to, or an opportunity for, the business. They should identify existing policies that fit into the ESG framework and identify which new policies may be beneficial to the company’s business.
- Decisions need to be made for the initiative, who from management will be responsible for its oversight, how employees will be informed of and participate in implementing the initiative, and how the company will evaluate the success of its initiative. Simply documenting a company’s existing ESG-related policies and developing new policies could take several years to implement and may take several attempts to be successful. Thus, boards and management need to be well advised to plan early or risk falling behind with a difficult path to catching up with peers.
- Thus, monitoring and evaluating ESG strategies is important. Companies should confirm that the underlying business reasons for policies are being achieved. For every company, continued monitoring of whether an ESG measure is in the best interests of the company should be the main goal.
Since these frameworks would be difficult for investors to understand & comprehend, some companies which help evaluate these criteria, address them & supports them to put it into perspective in terms of sustainable finance, need to be encouraged by the management.
Such evaluations need to be put forward & it should be the new normal on how we term a company to be credible.
SHOULD COUNTRIES AROUND THE WORLD MANDATE “ESG EVALUATIONS” FOR COMPANIES TO ADAPT TO IT?
Should countries set standards on ESG implications on the company’s activities? If there are, should it be imperative for companies to follow those regulations to comply & adapt to it?
Some countries have shown they do put importance on ESG regulations & there are some which don’t.
FRANCE is among the most advanced countries to adopt on ESG regulations, including mandatory disclosure and reporting sustainability indicators. Corporate governance is in line with advanced standards. French companies are also asked to disclose the social and environmental consequences of their activities under domestic law (Grenelle Act) and the financial risks from climate change. Apart from a strong regulatory rulebook, the AFEP-MEDEF Code and the recommendations from the Financial Markets Authority denotes non-binding guidance for best practice on governance and pay. Diversity wise, listed companies are legally required to have 40% women on boards in a bid to reach parity.
GERMANY’s ESG regulation is moderate as compared to France. Considering its economy is mainly invested in Auto & Manufacturing, there are corporate disclosure requirements for selected ESG aspects. The German Corporate Governance Code (Kodex) is the reference document for Germany’s best practices and works on a comply-or-explain basis. While it’s not world-leading, Germany has strong institutional and governance effectiveness, with much transparency and accountability.
INDIA’s social standards are low by global standards with significant inequality. The public places a lot of faith in judicial institutions and the court system enjoys its independence. India’s corporate governance framework is based on the recent “Companies Act of 2013” and the Securities Exchange Board’s (SEBI’s) regulations. Effectiveness of a Board and its further planning are an issue. Regulators like the Bombay Stock Exchange (BSE) have made ESG disclosure mandatory for the top 500 companies listed on the BSE and National Stock Exchange.
Like France, Germany, and also, the US, the UK among others; countries should implement stricter norms to evaluate and instruct companies to practice ESG criteria.
According to a McKinsey Report–
- A strong ESG proposition can help companies tap into new markets and expand into existing ones
- Positive social impact correlates with higher job satisfaction — when companies “give back,” employees react with enthusiasm.
- Taking proper account of investment returns requires that you start from the proper baseline. When it comes to ESG, a do-nothing approach is usually an eroding line, not a straight line.
Thoughts and Comments
As a multi-national corporation, they have a responsibility to act in the best long-term interest of their beneficiaries.
Environmental, Social, and Governance (ESG) issues can affect the performance of a company through to varying degrees across companies (subsidiaries, etc.), sectors, regions, and through time.
I believe that an economically efficient, sustainable system is a necessity for long-term value creation. With such a system in place, it will reward long-term, sustainable (responsible) investment and benefit the environment and society as a whole.
