The abbreviation ESG can be deciphered as “environment, social policy, and corporate governance.” In a broad sense, this is the sustainable development of commercial activities, which is based on the following principles:
- Responsible attitude to the environment (E – environment).
- High social responsibility (S – social).
- High quality of corporate governance (G – government).
In its modern form, ESG principles were first formulated by former UN Secretary-General Kofi Annan.
How compliance with the ESG principles is assessed
A business that claims a good ESG score must meet development standards in three categories: social, managerial, and environmental.
Environmental principles determine how much a company cares about the environment and how it tries to reduce the damage that is caused to the environment.
For example, shoe brand Timberland has partnered with tire manufacturer Omni United to make boot soles from recycled tires.
Social principles show the company’s attitude towards staff, suppliers, customers, partners, and consumers. To meet the standards, businesses must work on the quality of working conditions, monitor gender balance, or invest in social projects.
For example, the American outerwear brand Patagonia does not own the factories that make its products, so it cannot influence workers’ wages. To remedy this, the brand is channeling a portion of the proceeds from product sales to factories as part of its Fairtrade program to raise employees’ wages to a living wage.
Management principles affect the quality of company management: transparency of reporting, management salaries, a healthy environment in offices, relations with shareholders, and anti-corruption measures.
What is an ESG rating, and how is it formed
The ESG rating is formed by independent research agencies – Bloomberg, S&P Dow Jones Indices, JUST Capital, MSCI, Refinitiv, and others. They evaluate the development of companies according to three criteria – E, S, and G – and assign points on a scale of one hundred.
For example, the Kering conglomerate (fashion houses Gucci, Balenciaga, and Saint Laurent) since 2019 remains the leader of the MSCI rating among 28 companies in the clothing and luxury goods field. All thanks to his sustainability program, which included, among other things:
- Eliminating the use of toxic plastic by 99.8%.
- The use of “regenerated” cashmere, which is created from production waste.
- Launching a free online course on conscious fashion.
There is no single approach to ranking. All agencies analyze open data about companies, but they calculate points differently. Therefore, the ESG ratings of different agencies can vary greatly.
For example, MSCI has given retail chain Boohoo a high rating despite investigations that the company is underpaying employees and ignoring the lockdown during the pandemic. At the same time, other rating agencies gave Boohoo a lower rating.
The role of the board of the company in ESG
Whether a company adheres to the principles of ESG depends solely on its management. Managers who prioritize bringing the company to a high level and achieving its prosperity make appropriate decisions. Thanks to top managers, the enterprise has begun to take steps towards ESG.
Companies already succeeded in this matter include Banco do Brasil SA, Neste Oyj, and Schneider Electric. Admittedly, these are large companies, the transformation of which into a more environmentally friendly direction has cost more than one billion dollars. But it is precisely such a policy that the future of business on the entire planet lies in.