Environmental, social and governance - the ESG direction

                                                                                                      Shutterstock

ESG, the abbreviation for environmental, social and governance (as in corporate governance) has become the latest buzz method for performance measurement and reporting for large corporate entities. It covers a myriad of activities (for example, climate change, biodiversity, pollution, risk management, diversity, employee engagement and so on) and there are a plethora of ways of measuring ESG and weighting various scores with the result that there is not an overall single rating determined. Different ESG audit companies use different methods that can and do lead to different ESG ratings being given to the same client company. Confusing it can be.

ESG is not directly the same as environmental sustainability as ESG involves measuring against a set of criteria which are focussed on company process and practices. Sustainability in contrast is focussed on outcomes. Highly polluting and environmentally damaging industries would use ESG as a risk management tool to ensure that they have best practice processes to mitigate pollution, avoid accidents,  reduce the need for expensive regulatory requirements/compliance and hence the risk of costly litigation. Sustainability in contrast is focussed on the impact of the company's activities on people and the environment including the sustainability of the services and products.

In one respect ESG has evolved as a result of the strong movement to ethical investing and increasing demands from funding bodies (such as banks), investors and consumers for greater corporate responsibility to be demonstrated. Such demands also focus attention on company's social licence to operate in a range of industries that may have high impacts on communities. Where corporations do not demonstrate responsibility, the social licence to operate is placed at risk.