What is ESG?

The year 2020 brought great questions for companies and their investors. Covid-19 and the reaction to the pandemic exposed major industries’ weaknesses, and the scenario called for solutions. Much has been said about ESG reports in this context, and today we will explain the relationship between these topics and their importance.

ESG reports are carried out by large companies to provide transparency around three specific topics: Environment (related to the environment) social relations (relations between the community), 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 manner opens space for discussions of gender and ethnic diversity, human and labor rights, and data protection and privacy. Also, about 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 concerning 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 strategies that may be crucial for the future, especially around the ecological environmental related to industries and their influence on the use of natural resources.

Creation

The first use of the acronym was in 2004, from an initiative of the UN Secretary-General of that time, 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).

In the following year, a group of 20 financial institutions attended a conference in Zurich (Switzerland), where different topics regarding ESG were considered for several investment sectors. The event report was then published by Ivo Knoepfel, with 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 the eventual implementation of relevant measures on the topics.

ESG in 2021

Since 2005, the relationship between companies and ESG has grown greatly. It is notable in companies that propose to implement the metrics, the achievement of 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, last but not least, productivity.

In the same way that the dialogue around ESG has increased, as well as its presence – with expectations to grow even more – there are concerns about its application. The first one 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 highlighted due to the great focus that the environmental issue has on the harm 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.

What about the future?

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.