What is environmental, social and governance (ESG) policy?
Environmental, Social, and Governance (ESG) is a framework that helps businesses understand and measure their impact on society, the environment and how transparent and accountable it is.
Measurement of ESG criteria could differ widely from business to business (1)
The right reporting data provided through ESG criteria may give investors insights into management, exposure to risk and the opportunities created through ESG activity.(2)
On occasions, ESG could be a focus when companies communicate with investors on a range of issues, from resources to health and safety, human rights and business transparency. Providing detailed performance metrics against each of its three pillars is potentially something that could be attributed to ESG.(3)
Why ESG is important
The London Stock Exchange (LSE) has issued detailed guidance on ESG reporting, identifying eight priorities:
Strategic relevance: Identifying the significance of ESG issues to business strategies and models
Investor materiality: Explaining the ESG issues that are most relevant or material to business and how these may affect strategy and performance.
Investment grade data: ESG information needs to be complete, consistent, reliable, comparable and clear.
Global frameworks: Identifying the indicators and standards which are most relevant to stakeholders/investors.
Reporting formats: Companies can report ESG information in annual reports, standalone sustainability reports or in integrated reports.
Regulation and investor communication: Companies should use regulatory requirements as a base to develop an investor/stakeholder-focused approach to reporting.
Green Revenue reporting: Effectively communicate exposure to green products and services which enable transition to the low carbon economy.
Debt finance: The growth of the green bond market has amplified investor interest in financing linked to specific activities and projects delivering environmental benefits. (4)
Given the complexity of company reporting, these eight points might help to frame data needs in a given business in a more effective way. The LSE guidance could complement the range of global ESG frameworks and standards available. The aim of these is to improve the reliability and consistency of ESG reporting.(5) There is potential for investors and companies to embrace the frameworks and standards.
The Principles for Responsible Investment (PRI) network of investors 6promotes sustainable investment through the incorporation of environmental, social and governance into investment practice) and as of December 2023 it had 5,372 signatories (6) The six Principles for Responsible Investment provide a range of possible actions for incorporating ESG issues into investment practice.
Possible actions identified by PRI include:
Addressing ESG issues in investment policy statements.
Supporting development of ESG-related tools, metrics, and analyses.
Assessing the capabilities of internal investment managers to incorporate ESG issues.
Assessing the capabilities of external investment managers to incorporate ESG issues.
Asking investment service providers (such as financial analysts, consultants, brokers, research firms, or rating companies) to integrate ESG factors into evolving research and analysis.
Encouraging academic and other research on this theme.
Advocating ESG training for investment professionals.(7)
Government regulations require UK pension schemes to consider matters which are financially material to their investment decision-making. They should consider where climate change, and action to address climate change, might contribute positively to anticipated returns or to reduced risk.(8)
Some Global ESG reporting frameworks for companies to consider are (9):
IFRS Sustainability Disclosure Standards
CDP (formerly the Carbon Disclosure Project)
limate Disclosure Standards Board (CDSB)
Global Reporting Initiative (GRI)
Sustainability Accounting Standards Board (SASB)
Task Force on Climate-related Financial Disclosures (TCFD)
UN Global Compact (UNGC)
Workforce Disclosure Initiative
In 2023, the EU introduced the Corporate Sustainability Reporting Directive (CSRD), which will apply to around 50,000 companies.(10) The rules will start applying between 2024 and 2028.
Sources:
1 https://www.dnb.co.uk/perspectives/supply-chain/esg-strategy-how-can-sustainability-be-measured.html
4 https://sseinitiative.org/wp-content/uploads/2016/02/ESG_Guidance_Report_LSEG.pdf
5 https://www.thecorporategovernanceinstitute.com/insights/guides/whats-the-difference-between-esg-reporting-standards-and-frameworks/
6 https://www.unpri.org/download?ac=20150
7 https://www.unpri.org/about-us/what-are-the-principles-for-responsible-investment
9 https://www.techtarget.com/sustainability/feature/Top-ESG-reporting-frameworks-explained-and-compared