What is ESG?

ESG criteria relate to environmental, social and governance factors that are analyzed by prospective investors when investing in or underwriting debt instruments of a company. In general, it is a set of criteria analyzed by sustainability-oriented investors to assess a potential investment opportunity, from a non-financial angle.

When asking if a company is ESG compliant, what does this mean?

It refers to the internal compliance of a company with these 3 criteria.

Environmental criteria include the following:

• How much energy, water or other resources the company uses

• Use of renewable energy or energy efficiency measures implemented

• Waste management –

  • How much water is wasted,

  • How toxic waste is managed

• The recycling process -

  • What are the internal policy and actions related to recycling

• The carbon footprint of a company related to different actions, such as traveling, for example:

  • Is there a CO2 abatement/reduction strategy put in place?

Environmental and climate policies - compliance with environmental regulations is part of the Environmental factor.

Social criteria assess the way the company ‘interacts with’ or relates to internal and external stakeholders.

From an internal perspective, the way that the relationship with ones’ employees is managed is crucial –

• Is the work place a safe one from a health and safety perspective?

• Does the company offer training and continues education to their employees?

• Are the international labour standards and human rights respected?

• Is discrimination properly addressed?

• Does the company provide a fair pay/wage and other similar aspects?

With regards to external stakeholders: does the company have a supply chain policy that is ethical/ESG compliant? Does it encourage volunteer work or does the company have a positive impact on the local community via donations to local charities, charitable institutions or other like-minded initiatives?

Governance relates to the internal system of procedures and practices in the company. These are related to ensuring compliance with the law, ensuring transparency and accountability towards its shareholders and that factors such as diversity and inclusion are properly addressed by, for example:

• Diversity on the company’s board of directors;

• Transparent accounting methods; and

• Policies such as anti-corruption and anti-bribery policies are put in place.

What is essential to keep in mind is that the 3 factors Environmental, Social and Governance are often interlinked and interrelated, making it very difficult to comply with only one of them whilst ignoring the other. For example:

• Governance and social criteria overlap when companies aim at complying with international labour standards and human rights, or

• Compliance with an environmental law, such as managing toxic waste according to regulation, does overlap with the governance and social criteria as well.

Stay tuned to find out more details on what to do to ensure that your company does not engage in ‘green washing’ or ‘social washing’.

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