Until recently, the evaluation of investments and companies was based, almost exclusively, on the evaluation of financial statements and profitability. It became clear, however, that this was not enough in a society with the challenges we face today.
Gradually, factors such as the environment, social sensitivities and governance began to be discussed and included in the evaluation models.
One of the first references to the term ESG (Environment, Social & Governance) was recorded in 2004 in the report of the Global Compact, a United Nations body, “Who cares wins, Connecting Financial Markets to a Changing World”. The main message of the report was the interconnection of the financial and investment sector, with criteria related to the environment, society and corporate governance.
The shift to “sustainable or responsible” investments is not recent. The United Nations introduced the Millennium Development Goals in 2000. In 2012, the goals were transformed into the Sustainable Development Goals. Factors such as deteriorating climate conditions, corporate scandals, global economic instabilty, and even the COVID-19 pandemic have intensified society’s tendency and demands for action.
As a result, ESG has become one of the important, if not the primary, factor that guide the decisions of institutional investors and, consequently, of the boards of directors. The creation of ESG indices by organizations such as Standards & Poors and Morgan Stanley, reinforced this trend, with the Global Sustainable Investment Alliance recording that in 2018, “sustainable investments” in Australia/New Zealand, Europe, USA, Japan and Canada, reached $30.7 trillion, an increase of 34% from 2016.
A further reason that makes investing in companies that apply the principles of ESG more attractive, is the interconnectedness of the proper management of issues related to the environment, society and corporate governance, with the ability to manage and navigate crises.
Common reporting standard
One of the “obstacles” to the further expansion and adoption of ESG, was the absence of a commonly accepted standard. Last September, however, we had an interesting development. On September 22, the World Economic Forum published the “Measuring Stakeholder Capitalism Towards Common Metrics and Consistent Reporting of Sustainable Value Creation” report, which provides a framework and consolidated guidelines for managing issues related to the environment, society and corporate governance.
Particularly interesting, but also rare, is that the report is endorsed by the “Big 4”, Deloitte, EY, KPMG and PWC, which may signal a new trend in what will be expected of companies on environmental, society and governance issues. The report is built around 4 pillars, “governance, planet, people and prosperity” and can help companies use specific indicators to evaluate their actions in each pillar and publish how they create long-term value and contribute to achieving the United Nations’ Sustainable Development Goals.
What does ESG mean for companies?
Although one could argue that the principles of ESG apply to larger companies, there is scope for small companies as well, as they can demonstrate, in practice and with specific indicators, to their staff, partners and customers that they operate within a framework and with values that maximize the benefits, not only for the company itself but for society as a whole.
Although it is premature to say where the ESG shift and sustainable development may lead, it is certain that companies will have another tool that can support them in integrating international practices into their business model, highlighting their differences from the competition and operate more efficiently.
At the same time, investors and society are gaining a useful tool to evaluate companies, not only in terms of profitability and numbers, but also in the way they handle critical issues such as the environment, social well-being and governance.
The original version of the article was published in the Greek language in the “Phileleftheros” newspaper on 01/11/2020 (https://www.philenews.com/oikonomia/apopseis/article/1050285).