Integrating ESG aspects into a company involves recognizing the key role of environmental, social and governance issues in creating long-term value. It demonstrates its commitment to generating positive impacts in the environment in which they operates, to sustainable economic growth and to the transition towards decarbonized societies. They are essential when making decisions and making more responsible investments with the planet.
What is ESG
The ESG concept integrates the words Environmental (environment), Social (society) and Governance (corporate government), grouping the most relevant non-financial factors of a company into these three axes. It is an approach, both strategic and analytical, widely used by analysts and institutional investors to evaluate sustainability performance.
In fact, according to Janus Henderson Investors, a British global asset management company, the initial three “are today the cornerstone of sustainable and responsible investment by any company”. Society and interest groups increasingly demand more information about how companies manage issues related to sustainability.
The ESG criteria
Investing sustainably means including additional aspects to financial aspects in investment decision-making, specifically environmental, social and corporate governance factors. Below, and using the report Understanding Investments according to ESG criteria from S&P Dow Jones Indices, we analyze them one by one:
Environmental
Environmental criteria analyze the contribution and performance of a business with respect to environmental challenges, such as gas emissions greenhouse effect, the protection of biodiversity, the water resources or the deforestation. That is, it uses metrics to evaluate the environmental impacts of companies and their efforts to reduce them.
Social
Social criteria evaluate the relationship of companies with their social environment —employees, local communities and citizens in general— taking into account aspects such as employment, health, safety, diversity, etc. They largely reflect the company’s corporate values and strengthen the links established with communities.
Corporate governance
Corporate governance criteria are related to the governance mechanisms of companies, the rights of shareholders and the responsibilities of executive management. They examine companies’ decision procedures, their organizational structure, control mechanisms and compliance systems, among others.
Acronym ESG
A management approach that integrates CSR is a different way of leading corporations when pursuing the generation of shared value for all its interest groups and, to do this, you must take into account the sustainability of business models. The current context, with climate change as the main challenge, makes this approach more necessary than ever. The acronym ESG renews and updates the concept of CSR and organizes the most relevant factors around three axes, for which it establishes a series of criteria that define what responsible and sustainable investment is.
The most widespread opinion on the relevance of ESG factors shows the conviction that companies are more likely to succeed and generate excellent returns if they create value for all their stakeholders. “We believe that a well-managed and responsible company that cares about its employees, its customers and the environment is more likely to better resist and outperform its competitors.
ESG analysis offers valuable insights into factors that can have a significant impact on a company’s financial values and therefore helps to better inform investment decisions”, Janus Henderson Investors notes.
What is a Socially Responsible Investment (SRI)
It is a type of investment that takes into account ESG criteria to select the financial assets being invested. The reasons vary from the commitment to promote certain social reforms, such as decarbonization from economics or diversity and inclusion, to the conviction that a company with good ESG performance will offer better long-term profitability.
In other words, it is that investment that contributes to sustainable development, defined for the first time in 1987 within the framework of the United Nations as one that satisfies the needs of the present without compromising the needs of future generations.
What are the ESG principles?
Environmental
- Decarbonization
- Preservation of biodiversity
- Economy circular
- Efficient use of resources
- Innovation
Social
- Diversity and inclusion
- Security y health
- Training y development
- Commitment with the client
- Supply chain responsible
- Human rights
- Development of the communities
Governance
- System of corporate governance
- Cybersecurity and information privacy
- Ethics e integrity
- Responsibility fiscal
ESG+F
Due to the increasing focus on integrating sustainability and financial performance, the need arises for a framework that combines both aspects. For this reason, the ESG (Environmental, Social and Governance) framework incorporates a fourth component, Financial (Finance). The acronym ESG+F emphasizes the importance of financial evaluation along with traditional ESG criteria.
In this way, an economic dimension is added to the analysis, also evaluating the financial health of companies, their profitability, the management of economic resources and the ability to generate long-term value. This is a criterion that helps identify companies that are not only sustainable and responsible but also financially sound.
The opportunities offered by ESG investments
In 2008, the World Bank issued the first green bonus of history. Fifteen years later, in 2023, this instrument mobilized more than 42 billion dollars for some 690 projects focused on renewable energy y energy efficiency, sustainable mobility, sustainable agriculture and land uses, forests and ecological resources, water supply and wastewater management, sustainable infrastructures and solid waste management, such as technological garbage.
And it continues to grow because socially responsible investing is an unstoppable trend, which translates into enormous opportunities for the planet:
- Fight climate change through a reduction of carbon footprint by companies and better use of their natural resources.
- Encouragement of research through the promotion of projects that result in social good, such as cancer research or support for the most vulnerable groups.
- Development of new technologies with a positive impact on society, such as those that allow the construction of more sustainable buildings or smart networks.
- Promotion of social improvements related to education, health, equality, integration or diversity.
Find out what ESG criteria are, and why they are so important for Socially Responsible Investment...
