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ESG 101: Understanding Environmental, Social, and Governance

06 February 2023

The popularity of ESG investing is clear, but it is still a developing area and can be challenging for investors to make decisions. Read our article for the financial services sector.

The three main components used to assess the sustainability and societal impact of a corporation or business are environmental, social, and governance (ESG). By taking into account how businesses manage their impact on the environment, treat their staff, clients/stakeholders, as well as their ability to follow governance best practices, help to better predict the financial performance of businesses in the future.

ESG investment have increased in popularity in recent years as a result of growing investor awareness of the threats to their financial wellbeing posed by environmental and social challenges. ESG investments additionally provides the opportunity for businesses to build sustainable value over the long term.

ESG investment also supports the Sustainable Development Goals (SDGs), which are intended to advance environmentally friendly economic growth and social inclusion.

The Environmental component of ESG investments refers to how a company is managing its impact on the environment. This can include how a company is reducing its carbon emissions, using renewable energy, managing its water usage, and pollution/waste management. For example, companies that are investing in clean/renewable energy or implementing sustainable waste management practices would be considered to have strong environmental ESG performance. 

The Social aspect of ESG focuses on how a company is treating its employees, customers, and other stakeholders. This includes issues such as employee rights and fair labour practices, customer privacy, and community engagement. For example, companies that have strong policies in place to protect the rights of their employees, promote diversity and inclusion, and engage with the local communities in which they operate would be considered to have strong social ESG performance.

ESG's governance component examines a company's management and leadership, taking into account things like executive compensation, board diversity, and transparency. Strong corporate governance is essential for safeguarding shareholder rights and ensuring that a business is managed in a way that benefits all of its stakeholders. Companies with open leadership, unambiguous responsibility, and moral business practices, for instance, would be seen as having excellent governance ESG performance.

As more investors have become aware of the financial risks connected to environmental and social issues and the possibility for businesses to build long-term value through sustainable practices, ESG investing has become more and more popular in recent years. ESG factors are increasingly being taken into account by institutional investors like pension funds and endowments. Additionally, numerous nations and regions have put policies and rules into place to promote sustainable investing, such as the Sustainable Finance Disclosure Regulation (SFDR) of the European Union, which mandates that financial market participants and advisers disclose how sustainability risks are factored into their investment decision-making processes.

Companies that operate within the Financial Services sector are especially under pressure to improve their ESG performance due to the growing concern/awareness from customers, employees, and stakeholders about the effects on the environment and society. This includes disclosing their ESG data to the general audience. As a result, many businesses have started to create sustainability reports that outline their governance, social, and environmental policies in great detail. Investors can use these reports to assess a company's ESG performance and determine the best course of action.

Although ESG investment have become more popular, it is still a developing area, and there is no accepted approach to assess a company's ESG performance. Investors may find it challenging to compare the ESG performance of various companies because different groups may employ various standards. Additionally, some businesses might not completely disclose all the data required for investors to assess their ESG performance, which can make it challenging for investors to make wise decisions.

If you have found the above interesting and helpful or feel you/your team would benefit from more information, additional training, or a refresher course about ESG, please contact the team at Zing365.

As a specialist training provider to the insurance, corporate and financial services sectors Zing are proud to support over 400 clients and 20,000 learners each year and can help you with all your training and development needs.

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