What is ESG and why is it important for your business?

ESG is the acronym for Environmental, Social and Governance. ESG is a holistic concept about an organisation’s ability to create and sustain long-term value in a rapidly changing world, and managing the risks and opportunities associated with these changes. ESG is used as a framework to assess how an organisation manages risks and opportunities that changing market and non-market conditions create. ESG also puts a heavy emphasis on risk management, because monitoring and mitigating risks across all three dimensions (i.e. environmental, social and governance) is an important priority for any company that is serious about ESG. 

ESG metrics are not part of mandatory financial reporting required by Australian Accounting Standards or International Financial Reporting Standards, but organisations across the world are increasingly making disclosures in their annual report or in a standalone sustainability report.  

ESG factors

There is no universal categorisation for ESG factors, and some can be defined in different ways depending on the industry, company characteristics, and the business model. In addition to that, ESG factors are often interlinked, and it can be challenging to classify an ESG factor as only an environmental, social, or governance issue.

ESG factors can often be measured (e.g. employee turnover for a company), but it can be difficult to assign a monetary value to them (e.g. what the cost of employee turnover for a company is).

Description of environmental factors

Environmental factors address an organisation’s environmental impact and environmental stewardship. It is focused on improving the environmental performance of an organisation. 

The following table lists and provides a description of the environmental factors:

Environmental factor

Description

Climate change

Strategy and metrics targets, including whether the company has committed to set a science‑based target in line with net zero by 2050.

Land use and ecological sensitivity

For upstream supply chain:

  • Overall area of land used or affected
  • Annual change in area of land used or affected
  • Number of International Union for Conservation of Nature (IUCN) Red List of Threatened Species present in areas used or affected.

Air and water pollution

Introduction of harmful materials into the environment. Examples of pollutants are volcanic ash, trash or runoff produced by factories. Pollutants damage the quality of air, water, and land.

Biodiversity

Biodiversity boosts ecosystem productivity where each species, no matter how small, all have an important role to play. Greater species diversity ensures natural sustainability for all life forms.

Deforestation

Decrease in forest areas across the world that are lost for other uses such as agricultural croplands, urbanisation, or mining activities. Deforestation negatively affects natural ecosystems, biodiversity, and the climate.

Energy efficiency

Using less energy to perform the same task – that is, eliminating energy waste.

Water management

The control and movement of water resources to minimise damage to life and property and to maximise efficient beneficial use.

Fresh water availability

Fresh water consumption in water stressed areas.

Description of social factors

Social factors refers to how an organisation manages relationships with, and creates value for, stakeholders. The social dimension is focused on an organisation’s impact on its employees, customers and the community.

The following table lists and provides a description of the social factors:

Social factor

Description

Customer satisfaction

  • Innovation in better products and services

Data protection and privacy

  • Data protection from compromise by external attackers and malicious insiders
  • Data privacy governs how data is collected, shared and used

Diversity and inclusion

  • Gender pay equality
  • Percentage of employees per employee category, by age group, gender and other indicators of diversity
  • Wage levels

Employee engagement

Training provided

Health and Safety 

  • Total recordable injury rate (TRIR)
  • Absentee rate (AR)

Community engagement

  • Community investment
  • Country by country tax reporting

Human rights

Risk for incidents of child, forces or compulsory labour

Wealth creation and employment

  • Net number of jobs created
  • Net Economic Contribution
  • Net investment

Description of governance factors

Governance factors refers to an organisation’s leadership and management philosophy, practices, policies, internal controls, and shareholder rights. The governance dimension is focused on an organisation’s leadership and structure.

The following table lists and provides a description of the governance factors:

Governance factor

Description

Governing purpose

Whether the organisation has a stated purpose linked to social benefit and their core business.

Quality of governing body

Composition of the highest governance body and its committees by:

  • Executive or non‑executive
  • Independence
  • Tenure on the governance body
  • Number of each individual’s other significant positions and commitments, and the nature of the commitments
  • Gender
  • Membership of under‑represented social groups
  • Competencies relating to economic, environmental and social topics
  • Stakeholder representation.

Stakeholder engagement

A list of the material topics identified in the process of defining report content and how they impact stakeholders.

Ethical behaviour

Internal and external mechanisms for:

  • Seeking advice about ethical and lawful behaviour, and organisational integrity;
  • Reporting concerns about unethical or unlawful behaviour, and organisational integrity.

Risk and opportunity oversight

Integrating risk and opportunity into business processes by clearly identifying the principal risks facing the organisation specifically, the governing body’s appetite in respect of these risks, how these risks have moved over time and the response to those changes.

Bribery and corruption

  • Total percentage of governance body members, employees and business partners who have received training on the organisation’s anti‑corruption policies and procedures, broken down by region
  • Total number and nature of incidents of corruption confirmed during the current year but related to previous years
  • Total number and nature of incidents of corruption confirmed during the current year, related to this year.

Executive compensation

Incentives to senior executives to enhance company performance relative to prior years and relative to its competitors for the benefit of all shareholders.

Lobbying

Influencing or attempting to influence legislative action or non-action through oral or written communication.

Why is ESG important for Australian businesses?

Investors across the globe are increasingly demanding organisations to outline their ESG framework and approach in order to assess the organisation’s long-term sustainability. ESG has a potential significant impact on the following fundamental business issues relevant to the long-term success of the organisation:

  • Corporate reputation – ESG can enhance a company’s license to operate making it easier to accomplish business objectives and respond to crisis scenarios with key stakeholder groups.
  • Risk reduction – ESG can assist with the identification of immediate and long-term risks depending on the industry and business model.
  • Opportunity management – Shifting market and non-market conditions can expose unmet needs for new products and/or services, potential customer bases, and potential strategic relationships for addressing ESG issues.
  • Culture & intrinsic value – ESG maturity is an indicator of a company’s commitment to building a high performing, purpose-driven workforce and inclusive culture.

Need assistance?

Please contact Aletta Boshoff to consider your organisation’s ESG maturity.

This publication has been carefully prepared, but is general commentary only. This publication is not legal or financial advice and should not be relied upon as such. The information in this publication is subject to change at any time and therefore we give no assurance or warranty that the information is current when read. The publication cannot be relied upon to cover any specific situation and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss these matters in the context of your particular circumstances.

BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not give any warranty as to the accuracy, reliability or completeness of information contained in this article nor do they accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it, except in so far as any liability under statute cannot be excluded. Read full Disclaimer.