What is ESG and how is this used by businesses?

By Chris Winward

The term ESG has been bandied about a lot in recent years, especially following the repercussions of the Covid-19 global pandemic and the increasing urgency to respond to the climate crisis, but is it a new concept and what does it actually mean?

Surprisingly, ESG (environmental, social and governance) has been about for over 20 years, following its establishment in 2001, but its elevated position in the investment market has become more apparent of late. Increased concerns about the threat of global warming and the financial difficulties experienced by businesses following Covid-19, have led investors to look far more strongly at ESG when considering their investment decisions.

The framework is used by investors to measure the non-financial stability of companies they perceive as investment opportunities. There are three pillars to the framework – environmental, social and governance – which is being used by investors alongside financial risk factors.

Environmental

As the climate crisis has heightened, the environmental impact of businesses has been thrust into the spotlight. The environmental component in the ESG criteria evaluates a company’s environmental footprint.

The energy used and the waste generated during business operations is a consideration of those looking to invest. With varying rules, regulations and targets implemented by governments, investors are looking for businesses which are conscious of their carbon footprint and have a strategy to mitigate against climate change.

Social

Social responsibility is an important factor for many businesses. The ability for a company to be accountable and transparent has been proven to increase employee productivity, retention rates and profits[1] – all factors which contribute to the stability of a business.

Relationships held by the company with the general public, the community and its employees are a crucial aspect of the criteria. Investors want to know they are investing in a socially responsible business which values its members and the wider community. Risk factors associated with the business operations will decrease in situations where the community is behind a project.

Governance

Governance refers to the legal responsibility of a corporation to make decisions and operate in line with policies and regulations. The structure of the board, management and the business itself will be of interest to investors, as will the transparency and accountability of those in charge.

Investors want to make their investments in organisations which are operating legally and ethically and not involved in practices which may give rise to high levels of risk.

What does ESG mean for businesses like Privilege?

Aligning our values with the ESG framework is really important for Privilege Finance. We fund projects which generate green gas and reduce waste to support companies who are also looking to have a positive ESG impact.

As a renewable energy finance provider, the ESG criteria sits seamlessly within our remit. We want to fund projects which are sustainable, renewable and contribute towards resolving the climate crisis. They must also be both environmental and government compliant.

Large corporations and private investors are seeking to invest their money in sustainable and responsible assets, so it makes business sense too. In the aftermath of Covid-19 and the heightened recognition of climate change, investors want to be assured they are making investments with longevity and stability to survive the volatile market.

Investing in new businesses and technologies is one of the biggest challenges faced by investors. The lack of security and knowledge coupled with increased vulnerability can deter many investors from financially supporting projects. The ESG criteria can not only support investors in their financial decisions, but also help businesses looking for investment to showcase their stability in the market, even if technology is new.

Is it regulated?

There is no specific regulatory body which oversees compliance with the ESG criteria. However, businesses are encouraged to publish their operational impacts as part of their accounts. It is likely that, following the implementation of further net zero and environmental targets and standards in the future, a specific regulatory authority will be created to monitor business compliance with the ESG criteria.

Going forward, the ESG criteria will continue to be of significance in facilitating sustainable business investments, to help investors select funding projects which are environmentally, socially and legally responsible.

[1] How to Be Socially Responsible and Make a Profit – business.com