If you were to magically time travel 100 years into the future, what do you think it would look like?
Do you imagine it would be like “Star Trek”, where humanity will have utilized technology to overcome poverty and inequality and is now charting a course across the galaxy? Or would the future be somewhat like “Interstellar”, where the very existence of our species is threatened due to environmental degradation caused by corporations draining the Earth of all its resources?
While these sci-fi movies incorporate several fantastical elements to make their point, there is a kernel of truth to the ideas they present. Businesses, both large and small, have significant environmental impacts and can be powerful forces for societal and economic change. But precisely because businesses can be so powerful, it is important to have a conversation around regulation and putting into place an organic series of checks and balances.
In 2015, the United Nations put forth a set of global Sustainable Development Goals (SDGs) as a universal clarion call for the abolishment of poverty, protection of the planet, and the health and well-being of all humans. The 17 SDGs outlined by the UN (No Poverty, Zero Hunger, Gender Equality, Climate Action, etc.) are aimed at balanced, sustainable development on the social, economic, and environmental fronts.
Over the years, the involvement of governments, socially responsible investors, individuals, and organizations such as the UN has slowly created a series of best practices and standards that can be used to measure the sustainability and social viability of businesses. This set of standards is commonly referred to as ESG (Environmental, Social, and Governance).
In this piece, we will take a deeper look at ESG and try to understand why it is so vital for the future.
WHAT IS ESG?
ESG (Environmental, Social, and Governance) is a set of standards used to evaluate the societal impact and sustainability of businesses, investments, and organizations.
Environmental: Examines how a business protects the environment, such as with corporate policies about climate change, energy use, conservation of resources, limiting emissions, etc.
Social: Examines how a business/organization impacts the communities where it operates and how relationships between employees, management, customers, and suppliers are handled.
Governance: Examines an organization’s leadership, pay structures, shareholder rights, and audits
HOW ARE THE ESG SCORES CALCULATED?
There is no single standardized method for calculating ESG scores. Different companies and organizations weigh evaluation criteria differently and use unique scoring methods. Even with these different approaches, ESG score calculation usually involves the following steps.
- Information about a company’s environmental, social, and governance impact is collated from various sources such as disclosures and reports from the company, news reports, and external data providers.
- Using a set of industry guidelines and global standards, the data is evaluated.
- A score is then assigned to the company based on how it fares on the different issues. These scores are usually presented as a grade from 0-100 or A-F.
- This score is then compared against the industry average and the scores of a group of peers to make comparison easy.
WHY IS ESG SO IMPORTANT?
ESG has far-reaching implications, from subtle ones like economic viability to potentially seismic ones such as the habitability of our planet. There are several reasons why the ESG conversation is growing
- Business LTV: Companies that do well on ESG metrics are perceived as having more robust long-term growth potential since they can circumvent or build resilience to successfully overcome issues.
- Regulatory compliance: As governments around the world join the push for sustainable business, new policies and regulations are being implemented that businesses must comply with. Proactive adoption of ESG regulation might turn out to be a competitive advantage in the long run.
- Societal impact: ESG compliance is not just about building more profitable businesses. When adopted enthusiastically worldwide, it will ensure that companies behave more ethically and help improve the lives of local and global consumers and communities.
WHAT ARE THE DIFFERENCES BETWEEN ESG, CSR, AND SUSTAINABILITY?
ESG, CSR, and Sustainability are related concepts that are nested within each other. Let us see how.
ESG: Refers to a framework used to gauge the societal impact and sustainability of businesses.
CSR: CSR is just one part of the Social of ESG. Under the Social of ESG come the employees, the community, the vendors, partners, and end users - the obligations towards all societal partners.
Sustainability: This refers to a big-picture view of an equitable and sustainable global economy powered by ethical businesses. It is a set of worldviews and ideas that looks at addressing larger issues such as global warming, poverty, and pay disparity.
WHY ESG IS CRUCIAL FOR INVESTING?
In 2006, the United Nations laid out a series of guidelines known as the Principles for Responsible Investments (PRI). The PRI has over 2,000 signatories and is globally accepted as the benchmark for ESG investing.
With the use of ESG criteria, investors can gain an understanding of how a company performs across a wide spectrum of issues and considerations such as labor practices, board diversity, and carbon emissions. ESG Investing, or investing that takes into consideration ESG factors, is also known as “socially responsible investing.”
TANLA'S ESG JOURNEY IN 2022
At Tanla, sustainability is in the DNA of everything we do. We believe in a future where technology can be a powerful driver for positive changes. In 2022, we implemented several company-wide ESG initiatives.
WHAT IS THE FUTURE OF ESG?
ESG has become a crucial component of every corporate strategy – from risk management to opportunity capitalization. Bloomberg estimates that global ESG investment assets are likely to surpass $50 trillion by 2025. Private equity firms have also begun adopting ESG strategies for their portfolios.
Going forward, companies that anticipate and plan for ESG regulation are likely to emerge as market leaders. The reputational risks for non-compliance are too high. Additionally, the positive PR and branding that comes from being ESG-compliant will drive talent to organizations that work sustainably.
CONCLUSION
As overlaps and gaps in frameworks get ironed out and technologies like blockchain are integrated to ensure accurate reporting, we can move past greenwashing and other concerns to step into a world where businesses and their stakeholders can function in a mutually beneficial and environmentally sustainable manner.
At Tanla, we have enthusiastically committed to the United Nations Sustainable Development Goals and integrated them into our five aspirations – Green Planet, Positive Workplace, Empowered Communities, and Business Integrity.
Sustainable business is the future, and we look forward to leading the charge.
