The year 2020 brought great questions for companies and their investors. Covid-19 and the response to the pandemic exposed major weaknesses in the industry and the scenario called for clarity. Within this context, much has been said about ESG reports, and today we explain the relationship between these topics and their importance.
What is ESG?
ESG are reports carried out by large companies with the objective of providing transparency around three specific topics: Environment, related to the environment, Social, relations between personnel, and Governance, management issues.
Each of the topics unfolds in several conversations: the use of resources such as water and energy, carbon emissions, air pollution, biodiversity, etc., assemble a landscape of themes about the environmental issue. The social sphere opens space for discussions of gender and ethnic diversity, human and labor rights, and data protection and privacy. Also in the area of people, governance encompasses management inspections around possible corruption and whistleblowing schemes, as well as internal and external influences – the practice of lobbying, for example – and executive compensation.
Purpose
The main purpose of ESG reporting is to provide visibility to investors about business practices. Climate change, management problems in relation to officials or governments, are financial risks, and keeping this topic open serves as a tactic to attract these investors. The practice is also linked to management changes that may be crucial for the future, especially around the ecological relationship related to industries and their influence on the use of natural resources.
Historical
The first use of the acronym took place in 2004, from an initiative of the then UN Secretary General, Kofi Annan. The proposal was presented to more than 50 company presidents, and had the partnership of the UN Global Compact, the Swiss Government and the IFC (International Finance Corporation of private sectors).
The following year, a group of 20 financial institutions attended a conference in Zurich (Switzerland), where various measures regarding the three topics were considered for different investment sectors. The report on the event was then published by Ivo Knoepfel, under the title “Who Cares Wins “, in 2005.
It is interesting to mention that there have been efforts to implement social-environmental investment measures since the mid-1960s. The term ESG was coined in 2004 after decades of discussions and eventual implementation of relevant measures on the topics.
ESG in 2021
Since 2005, the relationship between companies and ESG has developed greatly. It is notable in companies that propose to implement the metrics, the expected positive results (lower risk and higher return on investments), but also, due to the insecurities that events such as COVID-19 have generated in investors, reliability, predictability and of course, productivity.
In the same way that the dialogue around ESG has increased, as well as its presence – with forecasts to grow even more – there are concerns about its application. The most present is the practice of greenwashing, where sustainability serves only as marketing for industries, and not as positive and relevant actions to the environment. This practice is also attributed to the great focus that the environmental issue has to the detriment of social issues, which should be just as relevant. Both are misrepresentations of what is proposed by ESG principles, and within the companies that are willing to follow the reports cohesively, positive results are seen in all assigned sectors.
Future Proposals
While concern about social and environmental topics grows among companies, investors, and consumers, so does the proposal to standardize ESG reporting. Reports are currently carried out following few structures, and despite having data reviewed by auditors, this can generate inaccurate and malleable documents. The standardization of reports would help in a better observation of the actions of companies in all areas proposed by ESG, and not just those that are responsible for being reported. In addition, it favors the reading of data by investors, who would have precise standards of analysis and comparison, and not just information.
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