Image by Nattanan Kanchanaprat
According to a paper published in the Harvard Law School Forum, the proportion of ESG users around the globe stands at 89%. ESG investing, also called socially responsible investing or sustainable investing, involves the consideration of environmental, social and governance (ESG) issues in investment decisions.
CEOs are increasingly encouraged to prioritize corporate ESG, alongside their other commitments. This is not just because ESG is used as a criterion by socially conscious investors to screen possible investments, but also because it is needed on a societal level.
This will not be easy. Economic pressures have mounted in recent years, not just because of the Covid-19 pandemic, but also because of the war in Ukraine, climatic disasters, and various other factors.
Businesses’ resilience and focus are likely to be tested in the coming years, as they attempt to balance corporate ESG with short-term economic pressures. Many CEOs are planning to focus less on ESG, digital transformation, and hiring.
While this may offer relief in the short term, it may lead to worsening long-term conditions.
Table of Contents
Introduction
Many CEOs believe that the world is heading for a recession, and their companies have conflicting priorities on their packed agendas as they scramble to prepare.
One of those priorities – growing increasingly important in a world wracked by climate change, war, and social unrest – is corporate ESG.
ESG refers to how companies manage opportunities, decisions and risks related to environmental, social and governance criteria. It is essentially a set of evaluation criteria for investors, and could be considered part of a broader shift towards socially responsible investing. Some examples of corporate ESG data include customer privacy breaches, carbon emissions, and water consumption.
Increasingly, investors, boards, and stock exchanges use social responsibility and sustainability data as part of their evaluation of business performance. While ESG is considered a non-financial performance indicator, it helps to ensure accountability for corporations’ impact on society and the environment.
Why is ESG Investing Important?
Over time, consumers started to focus on becoming more sustainable and buying products that were ethically sourced. This also influences their investment choices.
ESG investing has seen massive growth, as investors seek to support companies whose environmental and social values align with their own. By not paying any attention to these investors, your business could potentially be losing out.
Managing a business and ensuring its growth depend on a delicate balance. However, businesses, especially big businesses, are absolutely crucial in mitigating the issues we face, including the climate crisis, poverty, and so on. If there is an opportunity to change the playbook, there is no better time than now to take it.
Having said that, you should be cautious of making exaggerated claims or greenwashing your company’s policies. Aside from the obvious fact that this is unethical, regulators have also been cracking down on greenwashing.
Some companies that have found themselves in hot water over greenwashing include Deutsche Bank, BNY Mellon and Goldman Sachs, for spinning misleading claims about how they use ESG factors in their investment process.
Why ESG is on the Rise
Commitments of the financial sector: In 2006, the UN-backed Principles for Responsible Investment (PRI) was launched. Its first principle included incorporating ESG issues into the decision-making process and into investment analysis. In 2021, the PRI had 3,826 signatories – and this number continues to grow.
Capital cost: Businesses with strong ESG performance tend to incur lower capital costs. Investors see such performance as a sign of lower risk.
Fiduciary duties: While legal definitions vary across regions, fiduciary duty can generally be considered a relationship wherein one party is responsible for the best interests of another party. Fiduciaries consider information that could influence financial performance or an investor’s voting decision. ESG issues are considered important across many sectors.
What are the Criteria for Socially Responsible Investing?
Social Criteria
Social criteria include how a corporation treats people, including their employees. Consider:
Privacy policies and data protection efforts
Employee relations and engagement
Employee equity, inclusion and diversity
Standards of labor
A business’ impact on local communities
Customer satisfaction
Human rights, including slavery, exploitation, and child labor
Health & safety
Funding of institutions or projects that aid poor and marginalized communities around the world
Environmental Criteria
Some examples of environmental criteria include:
A corporation’s carbon footprint (including GHG emissions)
Depletion of natural resources
Energy performance
Waste management
Deforestation
Biodiversity
Water & air quality
Governance Criteria
These focus on how organizations create and manage internal system controls relating to industry best practices, transparency, and growth initiatives.
Some examples of governance criteria include:
Bribery & corruption
Political lobbying & donations
Whistleblower programs
Board composition (including structure & diversity)
Company leadership
Tax strategy (including internal controls, regulatory policies, and audit structure)
Executive policies & compensation
Conclusion
We hope that this article has given you an insight into ESG investing.
Increasing stakeholder expectations are influencing the ESG initiatives of corporation around the world. More and more CEOs are understanding that corporations that embrace ESG investing secure more talent, attract more loyal customers, and raise more capital.
As stated, it can be hard for management to balance priorities for long and short-term goals, especially at large companies. With this in mind, to help ease the load on some of your staff, we recommend daily reconciliation. NextGen Accounting offers bank reconciliation services, credit card reconciliation services, and consulting services.
To give you the most accurate and fastest reconciliation, we use our patented software CrushErrors, which we specifically created for huge amounts of data that other reconciliation software cannot easily manage. You can also obtain CrushErrors as a product if you’d rather conduct reconciliations in-house.
NextGen Accounting’s management team has decades of experience and includes former executives of Barclays Bank, Bank of America, and ICBC. Contact us today for reconciliation services or book a free demo if you’d like to get CrushErrors!