In today’s article, we engage you with a raft of issues that are pertinent to the ongoing discussion surrounding Environmental, Social, and Governance (ESG) concerns. By delving into these issues, we seek to provide valuable insights into this subject matter. If you’re looking forward to deepening your understanding of ESG and its impact, this article is definitely worth your time.
What are the 3 main pillars of ESG?
The three main pillars of ESG are:
I-Environmental Performance: This covers a company’s environmental policies and practices to deal with pollution (air, land, water) climate change or natural resource depletion.
II-Social Performance: This looks at a company’s environmental and sustainability-oriented social responsibility programs and their impacts in the communities where it operates. This could include initiatives such as workforce diversity and inclusion strategies or working on projects which directly benefit communities.
II-Governance focusses on how your company’s executive team is structured and its decision-making process. It assesses the company’s accountability, ethics and transparency measures with regard to business or environmental sustainability.
What are Environmental, Social and Governance (ESG) assets of a company?
They are factors which affect the performance of the company’s operations in a community. These include but are not limited to stakeholder relationships, environmental impact assessments, sustainability practices and product safety standards. They provide an insight into the long-term health of a business in the community in which it operates.
What is a company’s Environmental, Social and Governance (ESG) performance?
Environmental, Social and Governance (ESG) performance looks at a company’s environmental and social policies or activities to determine if they are making a positive impact on the company’s overall financial results. If the policies or activities are making positive impact, it means the company has a good ESG performance, but if they are not, then the company has a bad ESG performance.
Is there any difference between ESG performance and ESG rating?
Environmental, Social and Governance (ESG) rating measures how good or bad a company’s ESG performance is, as compared to other companies in the same industry. ESG performance on the other hand measures how successful a company’s strategies are improving its environmental and social policies. Environmental, Social and Governance (ESG) Rating is only concerned with the company’s current performance while ESG performance takes into account previous efforts of the company to improve its ESG strategy.
What does Environmental, Social and Governance (ESG) Analysis mean?
It is the process of evaluating a company’s environmental, social and governance policies and practices to identify potential risks and opportunities associated with the ESG factors. By considering those ESG factors, businesses can make more informed decisions for the long-term value creation.
What are the ESG Factors?
The ESG Factors include:
Environmental factors: Pollution (air, water or land), natural resources depletion, climate change, and carbon footprint.
Social Factors: Some of the examples are workplace safety conditions, suppliers’/vendors’ practices, diversity, equity and inclusion, consumers’ data privacy, wage equality.
Governance: Board Structure and diversity, ESG Disclosures (accountability and transparency), organisational integrity and ethics.
What is an ESG strategy of a company?
An ESG strategy is the company’s plan on how it will include ESG performance measures in its investment decisions or business model. A good strategy involves plans to improve the company’s ESG performance with the feedback or reports from ESG analyses.
Are there any types of ESG strategies available?
Some of the known ESG Strategies are:
- ESG Improvement/Integration: A company makes a deliberate commitment and integrates ESG performance into its operations. The company is transparent about the steps it takes to include ESG performance its operations.
- ESG Omission: A company deliberately chooses not to focus on improving its ESG performance.
What is an ESG Risk?
Environmental, Social and Governance (ESG) Risk(s) are the risks associated with the environmental, social and governance factors (which affect a company’s financial or operating performance. As highlighted early on, these ESG risks are risks posed by climate change, pollution, wage inequalities or poor governance practices.
How are ESG risks measured?
The ESG risks can be measured through a rating system, an index or a survey.
I-Sustainability Indexes –The indexes provide information about your company’s environmental, social and governance practices. These indexes are benchmarks or metrics for measuring ESG practices of a company.
II-Sustainability Surveys – These surveys gather data from a company’s manager, about their opinions on environmental and social issues. The surveys also look at how they carry out these practices in their day-to-day activities.
III-Sustainability Rating(s)– This is a measure of how well companies are performing regarding their environmental and social responsibilities. There are a range of criteria based on the ESG factors. It also considers issues such as materiality and governance of the companies.
What is an ESG material risk?
Environmental, Social and Governance (ESG) materiality is an assessment of which ESG factors would have a real and measurable impact on a business. Materiality is determined through a risk-based approach in which companies first assess their vulnerabilities and then determine how those risks can be managed or controlled. ESG materiality varies from one industry to another and depends on the risks and opportunities in each industry. Thus, the magnitude of exposure to ESG factors by companies are different, hence, the need to determine such materiality and the amount of resources the company can commit to manage those risks.
How is ESG materiality risk calculated?
ESG materiality risk is calculated by identifying the ESG issues or factors and then prioritizing them with the ones showing the most likelihood of occurring and the severity of the impact. This way, you develop an ESG materiality risk matrix to indicate the impacts (high/low) of those potential risks as well as the opportunities.
What does ESG Audit mean?
An ESG audit is a process which thoroughly scrutinises on regular basis the environmental, social and governance risks of a company’s operations, products or services. The rationale behind this audit exercise is to identify any potential ESG risks in the company’s operations so they can be controlled from escalating. This audit provides an assurance about the accuracy of ESG-related data which a company discloses to its stakeholders-investors, regulatory agencies and the public. Environmental, Social and Governance (ESG) audits can be internal but to ensure high level of independence, many companies are engaging the services of third-party assurance auditors to report on those ESG risks they face. Environmental, Social and Governance (ESG) audits are separate from financial audits because they all have different objectives.
Is there any difference between an ESG Audit and a Sustainability Audit?
There is a clear difference between the two forms of audit though they all aim at managing risks for long-term value creation. While an ESG audit focuses on the environmental, social and governance risks associated with doing business, sustainability audits on the other hand focuses on how companies can become more environmentally friendly and socially responsible in its operations
What is Sustainability Reporting?
Sustainability reporting is the disclosure and communication of Environmental, Social and Governance (ESG) goals by a company and the strategies towards achieving them.
Are there any standards or frameworks for Sustainability Reporting?
Sustainability frameworks provide companies with a clear roadmap for how they can operate in an environmentally friendly, socially responsible and economically sustainable manner. These are some of the standards for Sustainability Reporting- the SASB (Sustainability Accounting Standards Board), the Global Reporting Initiative (GRI), the Task Force on Climate-related Financial Disclosures (TCFD), the Carbon Disclosure Project (CDP) and the Greenhouse Gas (GHG) Protocol and ISO ISO14016:2020. The way companies report their non-financial issues of Environmental, Social and Governance (ESG) increasingly determines their reputation, investor confidence, transparency and consumers’ trust in them.
Why do investors need ESG Reports?
Investors are increasingly concerned about ESG issues or factors and their impacts on investments. They want transparency about how companies are managing environmental, social and governance (ESG) performance so that they can assess the risks and opportunities related to their investments. Environmental, Social and Governance (ESG) reports invariably help investors to critically evaluate a broader range of issues beyond companies’ financial performance. They rely on such reports to predict the long-term viability of businesses before making investments in them.
BERNARD BEMPONG
Bernard is a Chartered Accountant with over 14 years of professional and industry experience in Financial Services Sector and Management Consultancy. He is the Managing Partner of J.S Morlu (Ghana) an international consulting firm providing Accounting, Tax, Auditing, IT Solutions and Business Advisory Services to both private businesses and government.
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