Environmental, Social and (Corporate) Governance better known as ESG is an intangible key assessing factor for socially capable and mindful financial investors. It’s a framework that is mainly used to access the business practices and performance on various sustainability and ethical issues of the organization.
The meaning associated with this concept is that the responsibility undertaken by the investors includes environmental, social and governance issues. The term evolve i.e. Socially Responsible Investments, mainly focuses the three aspects i.e. Environmental, Social, and Governance issues along with financial returns. The scholars have increased their interest in the investment market in the recent past. It is still a debated fact that whether merging these thoughts in the process of investment will cost extra or whether it affects the performance financially.
ESG have mainly three key factors that are mainly used to evaluate a company’s sustainability and ethical impact. ESG considerations are increasingly important for investors, consumers, and stakeholders to access a company’s long term viability and reputation.
The three key factors of ESG are as follows-
i. Environmental (E)-
Environment states the preservation and protection of the society and the resources associated with it. Whether the company should adopt less carbon footprint and adhere the methods that do not harm the environment. It refers to a company’s impact on the natural world like-
(a) Climate change and carbon footprint
(b) Resource depletion and waste management
(c) Pollution and environment degradation
(d) Air and Water Pollution
(e) Biodiversity
(f) Loss Deforestation
ii. Social (S)-
The social facet mainly focuses about the consideration of the relationships with the peoples. Social aspect considered to be the base of business organizations. The organization which are socially developed take care of the dignity of its staffs and also focus on their growth and the said behavior puts and impact over its customers and business partners. It should also be taken into consideration that social behavior is not mere restricted to the business activities of business organization but also take care of its staffs in other aspect also. It relates to a company’s relationship with the society, including:
(a) Labour practices and Human Rights
(b) Community engagement and development
(c) Customer satisfaction and product safety
(d) Employee engagement and satisfaction
(e) Data protection and privacy
(f) Measures regarding upliftment of socio-economic conditions.
iii. Governance (G)-
The company requires certain standards for the administration of a company and this facet illuminate those principles. Governance maintains the transparency in the company and balance the standard of the governance in the company. Governance also maintains the management in executive manner in relation to stakeholders- employees, customers and shareholders. The estimation of the company has been guided through the governance. It focuses on the company’s leadership, management, and oversight, including:
(a) Board composition and diversity
(b) Executive compensation and accountability
(c) Transparency and reporting practices.
(d) Bribery and corruption
(e) Whistle blowing schemes
(f) Audit committee structure
(g) Engaging in illegal and unfair practices
(h) Composition of the Board of Directors.
The concept of ESG is evolving because of its importance in today’s era as the investors and consumers are increasingly interested in companies that are socially responsible and environmentally conscious (i.e. following proper guidelines issued by the appropriate authorities).
Evolution of ESG can be traced back during later 2000’s but the basic concept was prevailing since ancient era. The roots of ESG can be traced back to the 1960’s when investors began considering social and ethical factors in their investment decisions.
In the decade of 1970 the environmental movement gained significant momentum, leading to increased public awareness of environmental issues. This incident boosts the consciousness of the companies regarding the environmental issues.
In 1999 the UN Global Compact was launched that encourages businesses to adopt sustainable practices and align with international labor and environmental standards.
The rise of the term ‘ESG’ was first traced when it was used in a report titled “Who Cares Wins” published by the United Nations in 2004. That report mainly emphasized the importance of integrating ESG factors into investment decision making.
In toto India has 10 ESG centric funds and every fund has different values associated with it. All the funds are further categorized in global stocks, market capital, and passive funds. In India, several ESG funds are like Axis ESG funds, SBI Magnum Equity ESG funds, Aditya Birla ESG funds, etc.
The financial investors are rising and they are focusing their main concern towards the sustainable policies of the firms and companies they planning invest into. The tern associated with this investment is called ‘Responsible investing’. Now, the investors are also concerned about the affects of policies of the companies on the society and not only to the financial returns after considering this fact the investors plans to invest in the companies.
References
i. www.ibm.com/think/topics/environmental-social-and-governance-history#:tax