ESG (Environmental, Social and Governance) has become an international movement to align businesses with societal expectations.
Environmentally, our focus lies on corporate climate policies, energy use and waste disposal management as well as compliance with environmental regulations.
Sociologically, investors evaluate companies according to how well they treat their workers, promote diversity and inclusion within the workplace, keep customers satisfied, and actively contribute back into the community.
Human Rights and Labor Practices
ESG investing’s recent surge is evidence of investors demanding ethical business practices from companies they support, in search of improved long-term returns while fulfilling values-aligning purposes. This trend can be explained by two forces at play – investors are looking for long-term financial gains while aligning themselves with values-driven endeavors.
ESG issues related to investing may include the company’s carbon footprint, water use, raw material sourcing practices, labor management policies and practices, employee relations issues, diversity & inclusion programs and corporate ethics policies. Investors who take into account such criteria in their decision making can reap greater returns due to lower risk and operational costs as well as new marketing opportunities that lead to increased sales & market share.
But the commitment of companies to sustainable and ethical business practices should not become an excuse to ignore human rights violations. ESG approaches should serve as a reminder that investors and businesses have an obligation to respect human rights regardless of how their actions impact financial returns; investors should take care to avoid financing or supporting companies which violate international treaties or norms.
Resource Depletion and Pollution
As part of their efforts to enhance their ESG practices, many companies are taking steps to implement waste management and pollution reduction initiatives, using recycled materials in their products whenever possible and employing waste reduction measures like waste water treatment systems and green roofs. Such efforts help decrease harmful chemical use as well as preserve natural resources like water and land from being depleted.
These initiatives have also reduced the risk of environmental damage caused by companies, particularly those operating near eco-sensitive areas like riverbanks, wetlands or forests. Furthermore, such operations may engage in practices such as slash-and-burn agriculture or oil exploration that can irreparably damage ecosystems.
While these advances in ESG are encouraging, some critics contend that financial markets promote short-term investing and can distort corporate sustainability and responsibility. These critics call for reforms that encourage long-term evaluation of ESG investments as well as rewarding companies for sustainable and responsible practices; such reforms would help counteract quarterly results’ emphasis that can lead to poor decisions regarding ESG investments.
Biodiversity and Conservation
Environmental and sustainability initiatives have begun recognizing the need to preserve nature and biodiversity for future generations, which is great news. According to a 2023 report by Position Green, “natural capital forms the backbone of sustainable development – providing fresh water, soil fertility and stability, food, medicine and other necessities – its loss is a threat to humanity’s well-being”.
Stakeholders are demanding that companies protect and conserve biodiversity. They expect them to incorporate biodiversity considerations into sustainability programs, set conservation and restoration goals and collaborate with ESG data providers in measuring biodiversity impacts.
Investors can play an essential role in supporting efforts to preserve biodiversity by working with companies to craft and implement policies related to it, including conservation targets and restoration practices, responsible land management practices and disclosure metrics and reporting frameworks relating to it. Furthermore, public disclosure of biodiversity impacts and expenditures builds trust with stakeholders while simultaneously showing commitment towards conservation efforts.
Climate Change
Investors frequently look to ESG-compliant companies when selecting stocks to add to their portfolios. Fund management firms analyze and select mutual and exchange-traded funds that invest in public companies that meet certain criteria – known as positive selection. Investors can also engage in activism – the strategic voting of shareholders in favor of or against an organization’s policies, governance or business strategies – by voting proactively as shareholders to support or alter it.
Many of these issues have a direct bearing on the environment, communities and human health, while some also affect corporate reputation and its ability to attract customers and talent.
Engaging with ESG issues helps businesses stand out in an ever-more-sustainable global business arena, improving operational efficiencies and uncovering marketing opportunities. But the primary benefit of ESG lies in its contribution to long-term financial sustainability and success for companies; according to Milton Friedman over fifty years ago, “the social responsibility of business is to increase its profits,” something ESG can help facilitate by helping mitigate risks and optimize opportunities.
