Good to know

The ESG framework uses criteria – Environmental, Social and Governance – to help stakeholders understand an organization’s approach to the risks and opportunities that exist around sustainability issues. The framework is used to screen investments based on corporate policies and to encourage companies to act responsibly.

While the term ESG is often used in relation to investments, stakeholders are not limited to the investment community. Customers, suppliers, and employees are all increasingly interested in the sustainability of an organization’s operations.

What is ESG and what are the ESG criteria?

ESG is an acronym for Environmental, Social, and Governance. ESG is a framework based on the holistic view that sustainability extends beyond just environmental issues.

So Environmental, Social and Governance criteria are dimensions of the activities of a company that may impact society or the environment. They are three main factors used to measure the sustainability and ethical impact of an investment in a company or an economic sector, and the three pillars of extra-financial analysis. Finance coined the term “ESG” to designate these three key dimensions of responsible investment.

Environmental: This factor refers to an organization’s environmental impacts and risk management practices. These include direct and indirect greenhouse gas emissions, management’s stewardship over natural resources, and the firm’s overall resilience to physical climate risks (such as climate change, flooding, and fires).

Social: The social pillar refers to the organization’s relationships with stakeholders.

ESG has extended social impact expectations outside the company’s walls and to supply chain partners, particularly those in developing economies where environmental and labor standards may be less robust.

Governance: Corporate governance refers to the leadership and management of an organization. ESG analysts will seek to understand better how leadership incentives are aligned with stakeholder expectations, how shareholder rights are viewed and honored, and what types of internal controls exist to promote transparency and accountability in leadership.

 

The evolution of ESG criteria

Looking at the organization through the lens of ESG helps assess how well the risks and opportunities created by changing conditions, such as shifts in environmental, economic, and social systems, are being managed.

Environmental, Health, & Safety

As far back as the 1980s, organizations in the United States considered using regulation to manage or reduce pollution (and other negative external actions) produced in the pursuit of economic growth. They also sought to improve employee labor and safety standards, although there is still significant progress to be made.

Corporate sustainability

The Corporate Sustainability movement was well-known in the 1990s. Management teams made it known that they wanted to focus on reducing their firm’s environmental impacts, and to go beyond the legally-mandated reductions.

Corporate Social Responsibility

Then, by the early 2000s, the corporate sustainability movement began integrating ideas around how companies should respond to social issues. This would become known as Corporate Social Responsibility.

Environmental, Social, and Governance

Finally, by the late 2010s and into the 2020s, ESG emerged as a much more proactive movement.
ESG has now evolved into a comprehensive framework that includes crucial environmental and social impact elements. It also includes how governance structures can be amended to maximize stakeholder well-being.

 

To conclude, at Fairmat, we work with engaged stakeholders such as RAISE Sherpas, the first philanthropic acceleration program dedicated to startups from Seed to Series B.