ESG: Environmental, Social and Governance

“One of the first conditions of happiness is that the link between man and nature shall not be broken”— Leo Tolstoy.

Introduction

When we reach the pinnacle of our careers, we often come to realize that despite our professional success, we may have neglected our health, family, and social responsibilities. Unfortunately, these losses are difficult to recover, no matter how much money we have.

Content: ESG

What is ESG?
Why is ESG important?
What are the key challenges?
Key Challenges

Read More: https://bit.ly/C2CC2G (Cradle to Cradle and Cradle to Grave)

Objective

ESG stands for Environmental, Social, and Governance. It is a framework used to assess how a company manages its impact on society and the environment, alongside its governance practices. ESG factors are increasingly important for investors, regulators, and stakeholders who want to ensure responsible and sustainable business practices.

Rather than focusing solely on financial performance, ESG evaluates a company’s ethical and sustainable impact. Businesses that perform well in ESG tend to mitigate risks, build resilience, and create long-term value.

Once you go through the article, you will understand the meaning of ESG, why it is important and what are the key challenges.

Definition: ISO 59004: 2024

Circular Economy (Cl 3.1.1): Economic system that uses a systematic approach to maintain a circular flow of resources by recovering, retaining or adding to their value while contributing to sustainable development.

Sustainable Development (Cl 3.1.11): Development that meets the environmental, social economic needs of the present without compromising the ability of the future generations to meet their own needs.

Life Cycle (Cl 3.2.4): Consecutive and interlinked stages in the life of a solution.

Linear Economy (Cl 3.5.10): Economic system where resources typically follow the pattern of extraction, production, use and disposal.

End of Life (Cl 3.5.30): <Product> point in time when a product is taken out of use and its resources are either recovered for processing or disposed of.

Life Cycle Assessment (Cl 3.6.8): Compilation and evaluation of the inputs, outputs and potential environmental impacts of a product system throughout its life cycle.

Detailed Information

Our world is facing several global challenges: climate change, transitioning from a linear economy to a circular one, increasing inequality, and balancing economic needs with societal needs. Investors, regulators, as well as consumers and employees are now increasingly demanding that companies should not only be good stewards of capital but also of natural and social capital and have the necessary governance framework in place to support this.

The term “ESG” was popularized in the 21st century and often comes up in the same conversation as sustainability and corporate social responsibility (CSR). However, while sustainability and CSR function more as philosophies or end goals, ESG is more tangible; it encompasses the data and metrics needed to inform decision-making for companies and investors alike.

Read More: https://bit.ly/ClimateChnages

Environmental (E)

This component assesses how a company interacts with the environment. It focuses on minimizing environmental damage and promoting sustainability.

Key Areas in Environmental Factors:

Climate Change and Carbon Emissions: Efforts to reduce carbon footprint through clean energy and energy-efficient operations like Net Zero Carbon.
Waste Management: Proper disposal, recycling, and reduction of waste materials like Zero Waste to Landfill.
Water Management: Efficient use of water resources and wastewater treatment like Water Positive or Zero Discharge.
Biodiversity and Conservation: Protection of ecosystems and reduction of deforestation like Regenerative Agriculture Program.
Renewable Energy Usage: Adoption of solar, wind, and other renewable energy sources like 100% renewal Energy.

Social (S)

The social aspect focuses on how a company manages relationships with its employees, customers, suppliers, and communities. Companies are evaluated on their commitment to social responsibility, ethical practices, and community well-being.

Key Areas in Social Factors:

Employee Well-being: Fair wages, safe working conditions, and employee benefits (SA 8000)
Diversity and Inclusion: Promoting gender equality, hiring diverse talent, and ensuring equal opportunities (ISO 30415).
Human Rights: Respect for human rights across operations and supply chains.
Community Engagement: CSR (Corporate Social Responsibility) initiatives supporting education, healthcare, and rural development.
Customer Satisfaction and Safety: Ensuring product safety and providing ethical customer service (ISO 45001)

Read More: https://bit.ly/GreenWashiing

Governance (G)

Governance evaluates a company’s leadership, transparency, and adherence to ethical practices. It ensures that the company is managed responsibly and in the best interest of shareholders and relevant stakeholders.

Key Areas in Governance Factors:

Board Composition: Independent directors, gender diversity, and effective board oversight like women directors, 50% independent directors.
Transparency and Accountability: Ethical financial reporting and regular disclosure of ESG metrics like annual sustainability reports.
Anti-Corruption Policies: Measures to prevent fraud, bribery, and unethical conduct (ISO 37001).
Executive Compensation: Aligning executive pay with long-term value creation and ESG performance like 30% of CEO’s performance-based compensation is tied to carbon emission reductions and diversity goals.
Shareholder Rights: Ensuring fair treatment of shareholders and facilitating shareholder engagement like voting rights, dividend rights and participation in AGM.

Read More: https://bit.ly/SDGCircularity

Why ESG is Important for the Businesses

Sustainability and Risk Management: ESG helps companies mitigate risks related to environmental damage, poor labour practices, and unethical governance.
Investor Confidence: Investors are more likely to support companies with strong ESG policies as they demonstrate long-term value creation. Example: Apple: Ensuring ethical supply chain management and responsible sourcing of materials.
Regulatory Compliance: Governments and regulatory bodies are introducing stricter ESG regulations, making compliance essential. Example: SEBI (Security and Exchange Board of India) made it mandatory for the top 1000 listed companies at the National Stock Exchange (NSE)/Bombay Stock Exchange (BSE) to publish their report (BRSR: Business Responsibility and Sustainability Report)
Reputation Management: Companies with responsible ESG practices build stronger brand reputations. Example: Tesla: Pioneering electric vehicles (EVs) and renewable energy solutions.
Employee and Customer Engagement: Consumers and employees are more loyal to companies with sustainable and ethical business practices. Example: Microsoft: Investing in digital skills training programs and promoting diversity in technology.

Key Challenges:

Implementing ESG (Environmental, Social, and Governance) initiatives can be challenging for companies, particularly in emerging markets like India. Some of the key challenges organizations face:

Lack of Awareness and Understanding
Data Collection, Reporting and Transparency
Regulatory Compliance
High Implementation Costs
Climate and Geopolitical Risks

Read More: https://bit.ly/17SDGGoals

Conclusion:

In summary, ESG encompasses environmental, social, and governance factors that are crucial for evaluating a company’s ethical impact and sustainability practices. By integrating ESG considerations into business strategies, companies can reduce the impact of their operations, enhance the relationship with their stakeholders and contribute to a more sustainable future.

Read More: https://bit.ly/ISO59000Series

References:

ISO 14021: 2016

Industry Experts

This is the 230^th article of this Quality Management series. Every weekend, you will find useful information that will make your Management System journey Productive. Please share it with your colleagues too.

In the words of Albert Einstein, “The important thing is never to stop questioning.” I invite you to ask anything about the above subject. Questions and answers are the lifeblood of learning, and we are all learning. I will answer all questions to the best of my ability and promise to keep personal information confidential.

Your genuine feedback and response are extremely valuable. Please suggest topics for the coming weeks.

4 1 vote

Article Rating