Sustainable Industry

Everything you wanted to know about ESG but were afraid to ask

Do you know what ESG stands for? This is a trending acronym that stands for Environmental, Social and (Corporate) Governance. However, its meaning goes far beyond the mere words.

ESG is an approach to measure the extent to which a company works towards environmental and social goals that go beyond generating profits. It is, therefore, a paradigm shift, as practices previously associated solely with sustainability are now also considered part of a company’s financial strategy. Gradually, ESG has become a way of referring to actions adopted by businesses and organizations in order to become socially responsible, environmentally sustainable and good at corporate governance.

“ESG provides a very insightful perspective in the corporate world, since it has been attracting more resources and more attention to environmental, social and governance issues – but there is a risk that the acronym is confused with sustainability,” says researcher, consultant and specialist in sustainability, social responsibility and sustainable consumption Aron Belinky.

He is adamant about the acronym being incorrectly used in lieu of the term ‘sustainability’ in discussion forums, reports and research papers. “It is important to make it clear that ESG and sustainability are not the same thing: ESG is neither a replacement for nor an evolution of sustainability. ESG means a focus on sustainability from the perspective of its economic impacts – or its generation of value – for a company,” he says.

Thus, as Mr. Belinky reiterates, the approach represented by ESG will not always take into account issues that are important to the environment (whether the social or natural environment), but that are not directly connected to the interests of a business.

Most importantly, in Brazil, the acronym ASG – which stands for the Portuguese translation of ‘Environmental, Social and Governance’ – is also becoming widespread.

Themes and criteria – Coined in the 2004 report Who Cares Wins published by the Global Compact – an initiative by the United Nations (UN) that advocates for the adoption of social and environmental responsibility principles by businesses and organizations –, the acronym ESG is a sort of umbrella term that houses a variety of themes and criteria for evaluating the operation of a business. In addition, the criteria are in line with the UN Sustainable Development Goals (SDGs).

Environmental governance, for instance, will cover issues involving environmental management, energy efficiency, water and waste management, biodiversity, etc.

The social aspect of corporate operations involves issues related to human rights, labor relations, health and safety, inclusion and diversity, etc.

In terms of the actual governance, businesses are evaluated in terms of their codes of conduct, government relations, risk management, privacy and data protection, etc.

Opportunities – In addition to having a positive impact on the realms to which they refer, ESG practices are now becoming synonymous with socio-environmental responsibility, good reputation and credibility for businesses, which is leading to valuable corporate benefits and business opportunities.

Compliance with ESG criteria has a significant impact on how a business is perceived and how much it is valued by investors and consumers, in particular responsible consumers.

Investors, for instance, have been incorporating new evaluation criteria (regarding environmental and social responsibility, for example) to mere financial indices when considering a business for investment. Consumers, on the other hand, have been more attentive to sound consumer choices and businesses with values ​​that align with their own.

Relevance and Accountability – Mr. Belinky notes that it is important to understand whether what a business does is in line with the impact it can generate. “For example, the philanthropic actions of a company may be very commendable, but they might not serve their potential liabilities regarding the type of business it conducts, or its potential adverse impact on the natural and social environment in which it operates,” explains Mr. Belinky.

And then he asks: “Is what the business advertises as adherence to the ESG principles relevant to citizens, or is it simply a one-off and very minor action given the impacts that a company of that capacity could cause on the environment and on society?”

In contrast, Mr. Belinky says that sometimes a small action taken by a business for environmental, social or governance purposes could cause it to come across as, in fact, an ESG company. “So it is paramount to check the relevance of actions conducted – otherwise the acronym simply ends up serving some sort of greenwashing,” he says.