ESG stands for Environmental, Social and Governance and means using environmental, social and governance factors to evaluate companies and countries on how advanced they are in terms of sustainability.
Investing in ESG is investing in companies that score high on the environmental, social and corporate governance responsibility scales as determined by third parties, independent companies and research groups.
The acronym ESG first appeared in 2004, in a report by the United Nations (UN) entitled “Who Cares Wins”. With 20 financial institutions from nine countries, the document was created to establish guidelines that include environmental, social and governance issues for the financial market.
Despite its beginnings in the investment market, the ESG concept has, over the years, gained notoriety in other sectors of the economy. In 2015, the movement gained even more strength with the UN 2030 Agenda and the Paris Agreement. Both focused on the Sustainable Development Goals (SDGs).
Subsequently, in August 2019, the Business Roundtable, a business group that brings together the leaders of the largest US companies, released a letter breaking with the idea that business exists only to give return to shareholders.
In 2020, with the Covid-19 pandemic, the need for a conscious development agenda became even more evident. To reinforce this context, the World Economic Forum launched at the 2020 Annual Meeting in Davos, a metrics guide based on ESG values. Practice again reinforced at the January 2021 meeting.
The acronym, in English, brings together the three pillars of this movement:
- Environmental: the letter E of the acronym refers to the practices of a company in relation to the conservation of the environment and its action on topics such as: global warming and carbon emissions, air and water pollution, biodiversity, deforestation, energy efficiency, waste management and water scarcity. Actions related to the environment need to be contextualized beyond the companies themselves, involving the entire supply chain where they are inserted.
- Social: the letter S, in turn, refers to a company’s relationship with the people who are part of its universe. It involves concerns with issues such as: customer satisfaction, data protection and privacy, team diversity, employee engagement, community relations, respect for human rights and labor laws. This pillar even examines how a company defends the social good in the wider world, beyond its limited sphere of business, involving not only its employees, but also contractors, suppliers and everyone who, in some way, is part of the ecosystem in which the organization is involved.
- Governance: The letter G refers to measures related to the management of a company. It involves board composition, structure of the audit committee, corporate conduct, executive compensation, relations with government entities and politicians, and the existence of reporting channels. In this case, ESG seeks to understand whether the board and senior management serve the interests of all the company’s stakeholders — employees, shareholders, customers, etc.
More than numerous goals and intangible purposes, more than public declarations of good intentions and illusory policies, today companies have to prove with facts and data what they are doing and demonstrate with metrics and auditable indicators the positive impact of their activities.
ESG reports, also known as sustainability reports, offer companies the opportunity to be transparent with stakeholders about their approach to environmental, social and corporate governance guidelines.
Companies seek ESG, therefore, to generate a positive impact on society and, thereby, reduce risks, improve relationships with customers, suppliers and communities, and show investors that they are looking at the business in a holistic and transparent way. . What motivates all this engagement are the challenges faced by humanity in the environmental and social areas.