What is ESG and how to do it?

ESG stands for "Environmental, Social and Governance" and is a framework for a company's sustainability work, including environmental responsibility, social responsibility, and Corporate Governance.

Illustration av ESG

The ESG framework is designed to be integrated into an organisation's strategy to create value by expanding organisational goals to include the identification, assessment, and management of sustainability-related risks and opportunities. This may impact the environment, customers, suppliers, or employees and aims to contribute to sustainable development.

The term ESG was coined in 2005 but was established in 2015 with the launch of the United Nations' global sustainability goals (Agenda 2030).

The key to succeeding in your ESG efforts is to identify the areas in which your company has the greatest ability to influence, and then work to influence and measure improvements.

Environment (E)

The environmental aspect may involve how a company helps the world with climate change, reducing emissions, green transformation, biodiversity, energy efficiency, and preserving forests, land, and oceans.

Social Responsibility (S)

Social Responsibility primarily focuses on people who are in some way connected to the company, such as employees, customers, subcontractors, and other affected groups. It involves supporting equality, diversity, workplace safety, human rights, and inclusion.

Governance (G)

Governance is about streamlining and changing how the company is governed by increasing transparency, reviewing business ethics, cybersecurity, board composition, management structure, sustainability reporting, business models, strategies, transformations, regulatory compliance, whistleblower systems, how managers are appointed and replaced, and preventing bribery and corruption.

How to Work with ESG?

Most businesses can work with sustainability and make a difference in their environment in one way or another. Even though few companies have the means and size to make significant positive changes in the areas of environment, social responsibility, and governance entirely on their own, they can start with a narrower focus and integrate ESG into the business model where possible.

Thus, a significant difference can be achieved. Where can you stand out, and what is possible?

Consider the different ESG challenges that your company's stakeholders face. Map these and link the challenges to the potential value increase. Early on, consider how your company can measure progress and incorporate ESG as a factor in board and management decisions, budgeting, resource allocation, and analysis work. ESG should be a point on the agenda and bring new concepts and new communication.

Investigate risks and consider effects. For example, how will customers, and existing and potential employees view your company if you become more proactive and responsible in your sustainability work?

Here, we come to brand and employer branding. It is a difficult balancing act, as ESG is actually about sustainability. At the same time, there is also a potential "gain" in communicating about ESG to strengthen the attraction of your business.

However, it is important that sustainability work starts with a genuine commitment and willingness to improve the business. If the commitment is more about communication and the desire to strengthen the brand, it risks falling into the category of "Greenwashing."

Follow up on key figures and analyse the outcome to identify responsibilities and actions. Remember that you measure ESG to ensure that your business continues and develops sustainably with societal support.

Sustainability-oriented employees will be able to help you develop ESG work and move this strategic process and its various initiatives to an operational level.

Working Comprehensively with ESG

McKinsey suggests that there are five areas (opportunities) that you should cover if you are to work comprehensively with ESG as part of your strategic plan and business model:

1. People and culture.

2. Portfolio strategy and products, and how you can adapt them to ESG.

3. (Operational) processes and systems that need to be adapted, managed, and/or purchased.

4. Performance metrics to measure what you want to achieve, how it is going, and to be able to follow up.

5. Adjust (external) positions and engagements to consistently deliver on your ESG priorities and ESG goals.

ESG Due Diligence (ESG-DD) is a review and inspection of an organisation with sustainability issues and risks related to them in focus. Legislation is not in place (yet), but many in Europe use a checklist developed by the industry organisation Invest Europe.

The EU Commission has adopted a proposal for a directive on "due diligence" for companies regarding sustainability. The proposal aims to promote the green transition and protect human rights.

The proposal includes companies in the EU with more than 500 employees and a net turnover of more than 150 million euros. Other companies in "defined sectors with significant environmental impact" (with more than 250 employees and a net turnover of at least 40 million euros) are also included.

Sustainable Finance Disclosure Regulation (SFDR)

The EU regulation 'Sustainable Finance Disclosure Regulation' (SFDR) aims to redirect capital flows towards Sustainable Financing (effective from January 1, 2023) and should cooperate with ESG-DD requirements.

This means that there are now legal requirements to disclose how sustainability is considered in internal processes and what can be called "Sustainable Investments." Temporary rules have been in place since March 2021, and this has had an impact, according to Bloomberg.

ESG Criteria Drive Investment Decisions

ESG is becoming increasingly important for the fund industry, asset managers, and investors as the environmental, Social Responsibility, and Ethical Governance of companies are linked to economic sustainability and profit. It's no longer just about creating profit for shareholders.

ESG criteria

ESG criteria enable the mapping and comparison of companies based on how well they meet the criteria and include it in investment decisions and Portfolio Management. ESG factors are now tangible in strategy, acquisition, transformation, and exit phases.

The criteria are specific to different industries and should, therefore, be seen as several industry standards where different types of companies should relate to their own industry's risks and realities.

There are different types (and amounts) of factors, frameworks, and ways to measure ESG, but it is most common to measure on a scale from 0-100 or CCC-AAA. Asset Managers also usually talk about article numbering, where "Article 9" is the strictest categorisation in the EU.

Terms and frameworks for ESG analysis:

  • Sustainable Finance
  • ESG investing
  • Sustainable Investment
  • Impact Investing
  • Principles for Responsible Investment (PRI)
  • Socially Responsible Investing (SRI)
  • Sustainable Development Goals (SDGs)
  • Greenhouse Gas Protocol (GHG)
  • Global Reporting Initiative (GRI)
  • The Task Force on Climate-related Financial (TCFD)

Criticism of ESG

Criticism of ESG often revolves around the fact that large companies with a negative impact on the UN's global goals are greenwashing themselves with ESG. ESG has also given rise to a plethora of "certifiers" who are eager to help their clients look good.

A growing number of people also highlight that ESG is difficult to measure. According to McKinsey, the measurement is a "work in progress." Critics also argue that the focus is being taken away from more urgent problems in the world, that the need for ESG has "peaked," and that a meaningful and clear connection with the company's results is missing.

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