In order to develop a business, companies must frequently attract investment. This investment fund will be used for a variety of purposes, including the opening of new branches, the upgrade of the company’s factory and other infrastructure, and the recruitment of new talent.
At first glance, we might conclude that these investments have a positive impact on the companies. However, there are risks associated with the stellar growth and development of a company. These investments may pose a risk to the company’s environment and social order.
ESG emerges as a new investment benchmark standard. Have you previously encountered the term “ESG”? What are the advantages of ESG for businesses? Let’s immediately begin.
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What is ESG?
What is ESG? (source: freepik)
The acronym ESG stands for Environmental Social Governance. ESG is essentially a standard or guideline for businesses conducting investment procedures. Environmental, social, and transparent corporate governance are the three primary criteria of ESG.
ESG aims to evaluate the social impact and long-term viability of a company’s investments. These three criteria will be incorporated into the business and investment decisions of companies that have met ESG standards. In addition, the ESG standard will be applied to policy implementation.
ESG was initially developed as a response to investors’ insistence on sustainable economic growth. In response to investor demands, private companies provide standards and guidelines.
Regional and global investors are increasingly utilizing ESG metrics currently. At the national level, the banking industry is implementing ESG as sustainable financing. Since the introduction of ESG, companies have considered this metric when making investment decisions. Before deciding to invest, investors will also evaluate a company’s ESG practices.
Alternative names for ESG are ESCG (Environmental, Social, and Corporate Governance), RBC (Responsible Business Conduct), CSV (Co-Shared Value), and Impact Investing.
At first glance, ESG may resemble CSR (Corporate Social Responsibility). However, ESG and CSR have distinct principles and objectives. CSR is the company’s social responsibility, unrelated to its business operations. The company has a moral obligation to society and the environment. Nevertheless, the ESG concept must be implemented throughout the entire business process, including operations.
Also read: What is Business Ethics and Why is It Important?
ESG Criteria
As stated previously, ESG consists of three primary criteria: environment, social, and governance. Companies must meet these criteria in order to receive clear investment guidance. Now let’s determine the meaning of each criterion!
1. Environment
The environment is the first criterion that every company must meet in its ESG implementation. This implies that every business must comprehend the environmental impact of its operations. Companies must concentrate on conducting their operations in an environmentally responsible manner.
For instance, businesses must effectively manage waste to prevent environmental contamination. Additionally, their products should adhere to eco-friendly principles. Another example is that corporations should not conduct animal testing or harm animals during the production process. These regulations primarily apply to food and cosmetic manufacturers.
In addition, businesses are encouraged to utilize renewable energy sources, such as solar panels, in their operations. In turn, the company’s commitment to implementing ESG’s environmental criteria will benefit the company.
2. Social
The following criteria are social, meaning that businesses must cultivate positive social relations with the surrounding communities and institutions. It consists of the company’s relationships with its employees, customers, clients, and communities.
How businesses position themselves in society will have a significant impact on their brand. It may also have an effect on the company’s long-term profitability.
A company in the energy industry, for instance, should always inspect for the safety of its employees. Additionally, the company should be aware of employment issues in order to bridge the gap between the employee’s goals and the company’s interests.
3. Governance
Governance or corporate management are additional ESG criteria. The management of the company encompasses the manner in which it constructs and manages the business through an excellent organizational structure and competent leadership.
These criteria must also include the company’s policy, standards, cultures, disclosure, information, audit, and compliance procedures.
Companies should implement good governance consistently throughout all divisions and departments. During a crucial decision-making process involving all divisions, for instance, the leader can take a fair middle ground with no potential conflicts of interest. Another example is providing the company with transparent financial management.
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The Goals of ESG
The Goals of ESG (source: freepik)
Now that we understand what ESG is and its criteria, let’s examine the ESG implementation objectives. From the preceding explanation, it is safe to conclude that ESG goals encourage companies to maximize profits while contributing to the environment.
However, this is not the only objective of ESG. Here are some additional purposes served by ESG.
1. Expanding the market’s potential
If a company already has a positive social reputation as a result of its ESG implementation, the public will automatically recall the company’s name. Consequently, companies can reach new communities and markets with relative ease when launching a product.
2. Building consumer preference
ESG criteria may factor into a consumer’s decision-making process when selecting a product. Numerous consumers are eager to learn more about the product’s production method and materials. For instance, they may investigate the testing procedure, ingredient source, and waste management of the company.
3. Cutting Down Operational Cost
ESG implementation may also improve the budgeting practices of businesses. For instance, businesses with a solid ESG implementation may pay more attention to the environmental impact of their ingredients, allowing them to find additional ways to utilize them and reduce waste.
4. Increasing the company’s management performance
Good corporate governance may increase the management performance of the company. Companies that prioritize their employees’ health will earn their loyalty and boost their productivity.
5. Increasing the company’s credibility
The success of the company in implementing ESG will also improve the company’s credibility. Investors will place a higher value on the company if it can successfully implement the three ESG criteria. Consequently, the possibility of securing investments will increase.
These are the essential facts regarding ESG. In essence, companies that implement ESG will enjoy numerous internal and external benefits.
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Please visit our website for details and registration for ASEAN Business and Investment Summit (ABIS) 2023.
