What is ESG?

What is ESG?

In today's era, as issues related to the environment, society, and corporate governance are increasingly prominent, ESG is an indispensable concept for investors, businesses, and consumers. ESG stands for Environmental, Social, and Governance, representing the three key dimensions: Environment, Social, and Governance. It is a set of standards for measuring factors related to sustainable development and a business's impact on the community. 

• Environment (Environmental): Assessing issues related to a business's impact on the living environment, such as greenhouse gas emissions, water and waste management, raw material sourcing, and the impact of climate change...
• Social: Evaluating issues related to diversity, fairness, and inclusion within the business and with stakeholders, such as labor management, data security, community relations...
• Governance: Assessing issues related to company governance, business ethics, intellectual property protection, legal compliance...

This term originally appeared as CSR (Corporate Social Responsibility) - a term denoting a business's social responsibility, in a publication in 1953 by American economist Howard Bowen. Today, ESG has evolved from a specialized reporting system for financial investors to become a general term indicating how businesses or brands consider the impact of their products on society and their workforce.

Why is ESG important?

ESG is not just an investment trend but also a determinant of the success and sustainability of a business. Companies with high ESG performance often enjoy several advantages:

• Enhanced credibility and trust among stakeholders, especially investors and consumers, particularly the Millenials and Gen Z generations, who are more concerned about the values and purposes of businesses².
• Risk and cost reduction through resource optimization, energy savings, pollution reduction, improved safety and health for employees, legal compliance, and ethics³.
• Creation of new opportunities through product and service innovation, market expansion, collaboration with sustainable partners, participation in initiatives, and community development programs⁴.

How to assess ESG?

To assess ESG, businesses need to report their ESG practices based on sustainable development reporting frameworks. Key sustainable development reporting frameworks include:

• Global Reporting Initiative (GRI) Reporting Framework: GRI's standards include principles, concepts, and indicators to guide businesses in reporting the impact of their operations on environmental, social, and governance issues.
• International Integrated Reporting Council (IIRC) Reporting Framework: IIRC's framework aims to assist businesses in reporting how they create value in the short, medium, and long term by connecting information on strategy, management, performance, and business prospects.
• Sustainability Accounting Standards Board (SASB) Reporting Framework: SASB's framework provides standards to help businesses report on ESG factors relevant to financial value creation and risk reduction for investors.
• International Sustainability Standards Board (ISSB) Reporting Framework: ISSB's framework is a combination of previous sustainable development reporting frameworks, including GRI, IIRC, SASB, and CDP (Carbon Disclosure Project). ISSB's framework aims to create a common language and a global database of ESG information for businesses.

Additionally, there are other tools and indices for assessing ESG, such as:

• MSCI ESG Ratings: A tool to measure and compare the ESG performance of companies, funds, and indices worldwide.
• FTSE Russell ESG Ratings: A tool to assess and rank companies based on ESG criteria, as well as providing ESG indices to support sustainable investment decisions.
• S&P Dow Jones ESG Indices: A tool to provide information on the ESG performance of companies, funds, and indices, as well as offering ESG investment solutions based on S&P Global's standards and assessment methods.

Conclusion

ESG is an important concept with a significant impact on the sustainable development of businesses and society. To assess ESG, businesses need to report and provide transparent and reliable information on environmental, social, and governance factors. Investors, businesses, and consumers also need to enhance awareness and responsibility for ESG to support business activities that benefit both the community and the environment.