Google searches for the term ESG have more than doubled since the beginning of 2021, signalling its’ stratospheric rise to significance. But what actually is ESG?
What is the origin?
The term is widely considered to have emerged from a 2004 UN report titled ‘Who Cares Wins’. The report encouraged businesses to embrace ESG in the long-term. This report coincided with a global trend to care more about sustainability; as people campaigned for sustainability, respect and diversity in the workplace.
What does it stand for?
The "E" in ESG refers to Environmental factors, encompassing a company's impact on the planet. This includes considerations such as carbon emissions, energy efficiency, waste management, and sustainable sourcing practices. Companies are increasingly expected to adopt environmentally friendly practices to mitigate their ecological footprint and contribute to global efforts to address climate change.
The "S" stands for Social factors, which relate to a company's impact on society. This involves assessing how a company manages relationships with its employees, customers, suppliers, and the communities in which it operates. Social considerations include diversity and inclusion, labour practices, human rights, and community engagement. Investors are recognizing the importance of companies that prioritise social responsibility, viewing it as a key indicator of long-term success.
Lastly, the "G" stands for Governance, focusing on the internal structures and processes that govern a company. Good governance ensures transparency, accountability, and effective decision-making within an organisation. Key governance factors include the composition of the board of directors, executive compensation, shareholder rights, and adherence to ethical business practices.
Where is it relevant?
Since 2004 ESG has been slowly but surely incorporated into law. The 2006 Companies Act, set the standards in how companies should be governed. The 2010 Equality Act and aspects of the 2008 Climate Change Act set standards for the Societal and Environmental elements of ESG.
Where next?
ESG criteria have become integral to investment decision-making as investors seek to align their portfolios with ethical and sustainable values. Companies that excel in ESG performance are often viewed as more resilient, with better risk management and long-term growth potential.
However, investors often face issues due to a lack of standardisation across the sector. Companies and investors often measure ESG differently and this can lead to confusing ESG portfolio management.
ESG portfolio management tools, such as PortF can assist with navigating this fast-paced `and ever changing landscape.
