What is ESG?
Environment. Social. Governance.
Calculating and consolidating data around how a company deploys its resources that are drawn from and directly or indirectly impact the environment, social and governance is what ESG is all about. This data not only helps investors make sound decisions over the deployment of assets but also helps in risk management besides the obvious fact that we need to be more conscious of our impact on the environment and our society locally and at large. This in turn helps investors make better investment decisions.
Examples of areas that come under these categories:
Environment: Factors like carbon emission, packaging and waste management, etc.
Social: Considering volunteering efforts of a company, giving mentorship and apprenticeship opportunities, DE&I initiatives, etc.
Governance: Overseeing the business ethics of a company, handling corruption cases efficiently, etc.
Factors like these affect the general perception of a company and question its authenticity and responsibility towards the environment and the people. This eventually impacts the market value of a company and thereby its future investment opportunities.
There are a few ESG frameworks that companies can use as per their requirement, location and sectors (as mentioned in the earlier post). These frameworks use the scoring system and at other times imposed by the governing bodies as mandatory and therefore can be segmented into the following:
Benchmark Frameworks: Framework which requires responses to all questions and in turn gives the company a score that is provided by trained teams or individuals. Example: Carbon Disclosure Project (CDP) & Global Real Estate Sustainability Benchmark (GRESB)
Voluntary Frameworks: It doesn’t require score keeping or all the questions responded to. Companies can choose which questions they want to respond to depending on their sectors. Example: Global Reporting Initiative (GRI) & Task Force on Climate-related Financial Disclosures (TCFD)
Regulatory Frameworks: Under this category, the frameworks need response to all questions as they are mostly mandatory and required by government bodies. Scoring is not necessarily required. Example: Corporate Sustainability Reporting Directive (CSRD) & National Greenhouse and Energy Reporting (NGER)
Rating Agencies: The frameworks that fall under these categories not only require all questions to be answered but are also scored by trained individuals from accredited institutions. Examples: National Built Environment Ratings Scheme (NABERS) AU & Dow Jones Sustainability Indices (DJSI)
There are many other frameworks which fall into these categories and enable companies from different industries to assess and prepare their ESG reports and make sense of all the data available. It is a good strategy for micro and small enterprises to find out the frameworks used by their competitors and the investors so that they can be well prepared in the long run if they wish to create a sustainable business
Importance of ESG for Micro and Small enterprises:
Even the investors understand the importance of ESG metrics and expect their investees to report using certain established standards or frameworks as they have to report the same to certain governing bodies as part of certain regulations or disclose to the consumer.
Environment: Brands can track their utility bills and assess their carbon footprints. They also need to examine their supply chain and bring efficacy wherever needed.
Social: Brands can ensure that their employees come from diverse backgrounds and are subject to equal opportunities irrespective of their caste, creed, religion, gender identification. When it comes to people with certain disabilities, it is important for brands to give opportunities if the particular disability doesn't affect their roles and responsibilities.
Governance: Brands can make sure they maintain business ethics standards in every aspect of their workings and also expect the same from other businesses and stakeholders they associate with. They can ensure to have a diverse board of directors.
It is easier to build a structure from nothing than to redo or renovate parts of something that is well established since you need to ensure that shifting or pulling one piece does not crash the structure to the ground (literally or metaphorically speaking) like a game of Jenga.
Therefore, it is easier for brands to ingrain the values of ESG in their culture. This brings people of purpose together and strategically brings in results with metrics that show how the brand is contributing towards an efficient and responsible living. #esg #esgframework #sustainability #ecommerce
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