How Environment Social Governance is changing the way companies are managed and assessed

The Environment Social Governance expectations of shareholders and stakeholders are influencing the management of companies and benefiting the environment and society. Here's how

Environment Social Governance is a set of factors or standards which are used to see how companies fare in sustainability parameters. Environment Social Governance is widely referred to by investors while considering a company for investments. It is, thus, a yardstick for ensuring sustainable investing, as companies with high Environment Social Governance performance and high return are likely to deliver winning stocks to the investors. Environmental performance of the company is determined by the contributions of the company towards limiting environmental issues. Social factors include employee relationships, safety and health standards at workplace, labour rights etc. A company can demonstrate good governance through its leadership, internal controls, shareholder relationships, transparency etc.

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How is it assessed?

Out of the Environment Social Governance paradigm, environmental parameters can be the contribution of the organisation towards climate change and the ecology of the surroundings and the globe as a whole. Companies can take steps towards reducing the emission of greenhouse gases, making their infrastructure and operations more energy efficient, reducing their carbon footprints and taking bold actions against waste management and disposal. By considering these parameters the investors and shareholders are creating a concerted pressure against business houses to move towards a more environmentally responsible way of doing business. For example, if you are contaminating the place you operate in by disposing of the hazardous waste, your rankings on the ESG podium is bound to go downhill. The companies, on the other hand, can showcase their efficiency in the use of energy, waste, natural resources, wildlife and ecology etc. on occasions such as World Environment Day. That said, Environment Social Governance related efforts are something that is considered on an ongoing basis. 

Social parameters can be a bit more sensitive than the environmental ones. How much has the company contributed to corporate social responsibility initiatives? How sensitive is the company towards the health and safety of its employees? Did we spot your company initiatives doing volunteer work during last year’s tsunami? How about a fundraiser for the benefit of the poorer section of the local community? Social criteria are those that take into account the companies relationship and compassion towards its stakeholders which rests beyond the usual business cycle of suppliers and buyers.

Governance parameters pertain to the good governance of the organisation and its relationship with the shareholders. Showing a true and fair view of its books of accounts is the minimum an organisation can do to ensure transparency towards its shareholders and other stakeholders. Your shareholders should be assured that you use correct and transparent accounting principles and don’t indulge in unethical practices. The shareholders should have a voice that is heard when it matters and they must have the right to vote on all important matters related to the running of the company.

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Putting Environment Social Governance on the forefront

By giving weight to Environment Social Governance specific criteria shareholders and investors look beyond the profitability and growth of an organisation. Responsible investors steer clear of companies who are facing local unrest due to exploitative practices like mining in ecologically sensitive areas; companies facing the wrath of environment enforcers, like the National Green Tribunal in India; companies accused of workplace discrimination like Sports Direct in the UK with their zero-hour contracts with employees; or such other companies who are insensitive to the Environment Social Governance criteria. 

Shareholders trusts in public institutions have been on the decline, largely due malpractices that have resulted in a loss to the shareholders, the institutions or both. Shareholders are, therefore, keen on looking at management practices through the lenses of Environment Social Governance related criteria. Companies, on their part, can expect to face more and more questions coming their way that have a close bearing on the Environment Social Governance related expectations of the stakeholders and shareholders. The investment management company, Black Rock, sent out memos early last year to the CEOs of every S&P 500 and other major EU companies pressing the need for stronger compliance to Environment Social Governance in their compliance and management. Thus ESG is being built up from all quarters of the industry as something that is core to the businesses of companies and the need for a sharper focus on environmental, social and governance factors is being universally advocated. Have no idea about capital markets? Here's the beginner's guide to understanding markets.