Investors are looking at companies that have a business strategy with ESG criteria. It is not a fad, it is a reality that shows a change in investor behaviour.
The acronym ESG, which stands for Environmental, Social and Governance, refers in practice to the factors that make a company sustainable through its social, environmental and good governance commitment, without ever neglecting financial aspects.
The origin of this acronym dates back to the early 2000s and has been the result of the evolution of what was known as Socially Responsible Investment (SRI). But it goes beyond what we knew as SRI, since it has a holistic approach to all of a company’s processes, allowing us to see the scope of the impact that transcends the business.
Getting ESG criteria right in identifying, managing and measuring them within a company already has a direct impact on its ability to receive investment, its reputation and, by extension, on the sustainability of the business.
What are ESG criteria for?
ESG criteria have blurred boundaries. The best approach is to delimit the company’s capacity for action in these areas so that intangible results are easy for investors to identify.
To achieve this objective, advice on an ESG index is crucial, as it allows for more direct insight into information of interest in environmental, social and corporate governance matters.
However, an organized and clear ESG index will allow, firstly, managers and executives to make better decisions within the company and, secondly, investors to recognise and reward the efforts of companies with capital that lasts over time.
To determine which components are part of the ESG criteria, they must be analyzed separately.
ESG Environmental Criteria
Environmental criteria within an ESG strategy are considered to be those business activities that have a positive impact on the environment. An example of this could be actions to reduce pollution and waste generation or the emission of greenhouse gases.
Activities should not only mitigate the negative effects of the business and may have a proactive vision, such as the reconversion of the energy matrix or the protection of biodiversity.
ESG Social Criteria
In this section, we find mainly actions related to working conditions and respect for Human Rights. It also includes the management of relations with communities where we operate, such as indigenous populations, for example.
Furthermore, this set of criteria stands out for the protection and promotion of a diverse and inclusive company, as well as a healthy space for employees and the community at large.
ESG Good Governance Criteria
This area covers issues related to the corporate governance of organizations, their corporate quality, their culture and their management processes. From executive compensation, through transparency plans and the fight against unethical practices, to successful tax strategies.
Particular attention must be paid to developing solid internal policies with clear indicators that include factors such as outsourcing, regulatory compliance or employee aptitude, among others.
Sustainable investment and its key in ESG
Sustainable investment is one that combines environmental, social and good governance concerns with financial criteria. This model discriminates against companies based on their sustainability strategy and has been growing significantly in recent years.
What is not ESG?
Given the growing attention that ESG criteria are attracting in the corporate world, it is necessary to know which strategies fit within their parameters and actually have a social impact.
The basis for identifying whether a strategy is framed within ESG criteria is in the Sustainable Development Goals (SDG) set by the UN in 2015. This is the comprehensive framework for advancing a sustainable plan.
However, ESG parameters are not:
- Activities based solely on general values. Investors and managers shy away from general statements. Actions must be supported by specific indicators that show the creation of differential value and provide useful information.
- Nomenclatures that accompany existing processes. It is not about changing the name of what we already did; ESG parameters must combine novelty and business model.
- Annexes within the income statements. The approach must be integrated and have a cross-cutting impact on the business.
