What is ESG
Most national and international companies are being evaluated on an annual basis by collecting public ESG information disclosed by companies through corporate social responsibility (CSR) or sustainability reports, annual reports and websites, and other public sources, as well as through company direct contact.
As we know that ESG stands for Environmental, Social and Governance, Where:
Environmental – It talks about the company’s energy and material flow like CO2 emission, waste disposal, energy usage type, use of natural resources.
Social – It conveys the relationship of company with its stakeholder in the entire supply chain which includes employees, suppliers, customer and community where they operates.
Governance – This criteria disclose about the company’s transparency, corruption, shareholder rights, employee pay etc.
So, in a nutshell ESG are set of standards defining the way company operates its business. ESG report or ranking are used by investors (Assets Management company or Government) who wants to mitigate the risks associated with poor Social, Governance and Environmental practices. These investors prefer to engage their investment in Socially Responsible Investing manner.
Companies that score well on ESG metrics are believed to better anticipate future risks and opportunities, be more disposed to longer-term strategic thinking, and focused on long-term value creation.
But ESG ranking provided by various agencies have some flaws too because the data criteria on which basis they provide their ranking often comes from the companies sustainability or corporate social responsibility reports. For example a tobacco manufacturing company has better ESG ranking than a pharmaceutical company and the reason coming out to be is the difference in tobaccos company’s CSR practices. Many a times the impact of the company in the long run for community is missed out in the methodology.
Having said that, the introduction of ESG ranking has definitely put company in the radar to do the business responsibly and ethically. The ESG ranking criteria has set a framework following which the company can improves its operational inefficiency to be chosen as sustainable partner over a long period of time.
Over the years the ESG ranking is not only looked by asset management company but common people also to better understand the brand they are dealing with. Today’s conscious consumer don’t want to be connected with the brand who are creating a hole in the society.