Is ESG just the latest buzzword?

Last week we introduced the Environmental, Social and Governance (ESG) framework as an evaluation – not valuation – criteria to potentially predict sudden drops in price shares due to scandals or media crisis.

In this second and last part we will see how ESG is likely to evolve and to become more intertangled with the everyday business life.

Undeniably the US are at the forefront of the ESG movement.

Last week we have seen how the E is the most trending topic on the media. Environmental impact can be assessed and measured relatively easily. CO2 in the air is an obvious indicator. Registered temperature is another. But when it comes to the S, all become more subjective. According to Judy Samuelson, Executive Director of the Business and Society Programme at the Aspen Institute, 85 per cent of a company’s valuation can be attributed to intangibles such as trust and reputation.

A measure that many corporations are implementing — and often must implement to maintain the status of certain certifications — is to offer a whistleblowing route to employees who want to anonymously report unfair practices and discrimination at work.

Apple has tied their bonus system to the E and S by adapting performance incentives to include ESG elements.

Apple’s Compensation Committee will assess executives on alignment with “Apple Values and other key community initiatives during 2021” to modify its bonus payouts by up to 10 per cent.

Currently, 20 per cent of companies on the Russell 1,000 link cash incentives to ESG performance. While the Corporate Social Responsibilities (CSR) was the buzzword 10 years ago, ESG seems to be stealing the show moving forward. While CSR was focused on the S alone, ESG seems to be more holistically integrated.

Many companies have announced this year that besides the usual Financial Reports they will publish ESG and CSR reports to demonstrate transparency and best practices beyond business.

ESG Accreditations and Awards are also a reality. Acer Inc received a Silver Class distinction in the S&P Global Sustainability Yearbook 2021, which featured only the top ESG (environmental, social and governance) scoring companies.

A pioneer on E has been Home Depot. Since 1999 they implemented the Wood Purchasing Policy, becoming an ethical leader in the sourcing guidelines.

Home Depot’s strict procedures are aimed at protecting developing American forests. An annual Responsible Sourcing Report is published to detail the standards, audit process, supplier partnerships and more.

The governance part of the equation is indeed the most robust, with part of it often being mandated by law or requested by regulating agencies. For example, bribery and corruption is something that has been frown upon for decades. So are elusive tax strategies.

Banks and financial institutions have been investing more and more on compliance, especially with regards to anti money laundry measures. So, nothing much new in the G. But when it comes to E and S, a multitude of aspects are new and needs time to adjust.

With many observers requesting for more EGS accountability, perhaps being mandated by government, the conversation in the US ended up on the agenda of the Securities and Exchange Commission.

Yet, despite the obvious excitement about ESG, SEC Commissioner Elad Roisman clarified that “SEC rule-writing is slow by design” and does not believe there is enough certainty around standardisations for new ESG disclosures in the immediate future. (Concluded)

(The writer is a member of the International Press Association)