Investors globally are increasingly embracing ESG standards, which focus on factors such as, human wellbeing, the environment, and the welfare of the economy. ESG concept was initially introduced in the United Nations Principles for Responsible Investment in 2006.
Notably, the interconnectedness between the planet, people and profits, has been more revealed during the covid-19 pandemic, which has accelerated the integration of ESG principles into investment and business policies.
ESG stands for Environmental, Social and Governance issues, which underpin the sustainability, ethical operations and financial performance of an organization. ESG reporting by companies provides data on how their operations influence environmental, social and corporate governance areas. ESG reports are used by potential social conscious investors to screen for beneficial and ethical investments.
ESG factors cover several topics that underpin all organizations and industries, some of the wide scope issues include:
The environment is affected by global production processes and consumption, which contribute to environmental concerns such as:
Social factors encompassed in the ESG relate to human wellbeing, which is the responsibility of investors and companies to ensure they concern themselves with social issues such as:
Governance in ESG relates to control methods that must be observed by organizations, to avoid getting into conflicts with the law, to facilitate long-term benefits for employees, society and shareholders. Some of the corporate governance concerns covered in the ESG include:
EU taxonomy is described as a common system of classification for sustainable environmental and economic activities that scale up the implementation of the European Green Deal and sustainable investment. The Taxonomy Regulation established officially in July 2020, provides a framework that must be considered by the EU taxonomy when classifying economic activities that qualify or pass as environmentally sustainable.
The EU Taxonomy Regulation caters for six major environmental objectives that must be adhered to by sustainable organizations;
Climate change mitigation
The sustainable use and protection of water and marine resources
Climate change adaptation
Pollution prevention and control
The transition to a circular economy
The protection and restoration of biodiversity and ecosystems
Project certification
Investors can certify the validity of a project by evaluating the activities involved and comparing the project’s sustainability with the taxonomy regulation for sustainable investing. The government and legal jurisdiction of a country where an investment is being implemented are involved in project certification, based on its compliance with environmental, social, and economic sustainability provided in taxonomy regulation objectives.
Greater clarity for investors
Taxonomy in ESG is essential in providing greater clarity for investors to understand the various environmentally sustainable objectives, which should be observed in all economic activities undertaken by responsible investors. The taxonomy classification list of sustainable economic and environmental activities points investors to the right activities and projects with lower risks and higher long-term returns.
Sustainable economic activities
Companies can evaluate sustainable economic activities as provided by the ESG taxonomy list before investing in projects. Sustainable economic activities qualify as environmentally friendly or sustainable by meeting the six Taxonomy Regulation objectives.
The level of observance of ESG principles by organizations and investors can be perceived as a measure of a company’s sustainability. ESG Reporting is relevant in the measurement of sustainability impact, by providing factual quantitative and qualitative data relating to an organization’s operations, and its impact in areas of environmental, social, and corporate governance. ESG reports that indicate positive impacts show that companies are striving towards sustainability and are paying attention to concerns of the environment.
Impact of Financial Investment in ESG
ESG investing has significantly increased especially with the recent 2020 Covid-19 pandemic that has caused uncertainty and market disruption, pushing investors into giving high priority to ESG funding to increase resiliency. According to BCG, $30.7 trillion was invested globally in 2018 to mitigate negative corporate engagement, with an increase of 34% of the amount in the following two years. The first three months of the Covid-19 pandemic saw about $45.6 billion flow into the ESG funds.
More investors are evaluating ESG reports produced by companies before investing to measure the level of sustainability supported in their compliance with ESG regulations. Portfolios that feature higher investment in ESG sustainability are deemed to perform better financially due to higher returns on ESG funds invested as a result of higher resilience against market disruptions.
Focus on Universal Disclosures
Allowing Sector Disclosures
Introduction of Dual Materiality
Convergence of ESG Reporting Standards
Different countries portray different ESG reporting standards, which affect uniformity and consistency. Overlapping standards presented by various companies increase the confusion, which has driven the IFRS to suggest the convergence to one acceptable reporting standard internationally.
Company Growth
Compliance with ESG standards builds the company’s reputation and recognition, allowing the company to drive greater consumer preference and acceptance hence expanding its market gap. Companies that conform to ESG guidelines find it easier to expand since they can gain government approval and licenses to tap into new opportunities.
Reduction of Operation Costs
Reduces Legal Intervention
Increased Employee Performance
Organizations thrive greatly when they can attract skilled talents and retain high-quality employees. Providing suitable working conditions, training, motivation, diversity and inclusivity are part of social responsibility actions recommended by ESG that stimulate improved performance from the organizational workforce.
High Returns from Sustainability Investment
[Interview] We talk to sustainability communications expert Rosie Davenport, founder of Impact Focus, about greenwashing and why a clearly communicated sustainability strategy is imperative for business survival.
[Interview] We meet Pedro Olazabal, co-founder of Hands-on-Impact and impact measurement specialist.
[Interview] We speak with Daniel Hires, Impact and social innovation strategist and facilitator for systemic transformation.
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