ESG stands for Environmental, Social and Governance, which form the three pillars of sustainable practice. These are also criteria used by ratings agencies and investors in ESG ratings, a ratings system designed to assess the sustainable practices of a business. ESG ratings are primarily used to assess risk and growth factors by prospective investors, brokerage firms and mutual funds.
The Environmental criteria refers to how well a company acts as a steward of nature, how it handles waste, pollution and its use of natural resources.
The Social criteria refers to how a company treats its employees, suppliers, customers and wider community it operates in.
The Governance criteria judges a company’s leadership, executive pay, internal operations, shareholder rights, and overall transparency.
The ESG rating was originally designed as a risk management tool, but it’s also a strong indicator of long term growth, companies that incorporate sustainable practices tend to avoid disaster and stay innovative.
Consider the Deepwater Horizon Oil Spill which happened in April 2010, it not only resulted in the direct deaths of 11 people and created an environmental catastrophe but also cost BP somewhere around $65 Billion Dollars¹. and resulted in BP’s share value falling by 51% over 40 days². BP has yet to recover its market position.
ESG ratings help investors and companies not only invest ethically but also to avoid disasters like the Deep Horizon Oil Spill, a good ESG rating is an indicator that a company acts in a responsible and ethical way, and is unlikely to find itself the centre of controversy.
Higher ESG rated companies are also more likely to give long term returns, as solid ESG policies indicate good management, resilience and innovation, meaning that even profit motivated investors are likely to take ESG factors into consideration.
Incorporating ESG practices into regular business is a solid way to increase the value of your company’s brand and improve company culture. With the result of the recent COP26 summit behind us it’s likely that sustainability will be the future of business, by starting to think about these criteria now you will ensure that your business is prepared for the future.