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.
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).
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:
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:
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 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.
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.
Using less energy to perform the same task – that is, eliminating energy waste.
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.
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:
Data protection and privacy
Diversity and inclusion
Health and Safety
Risk for incidents of child, forces or compulsory labour
Wealth creation and employment
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:
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:
A list of the material topics identified in the process of defining report content and how they impact stakeholders.
Internal and external mechanisms for:
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
Incentives to senior executives to enhance company performance relative to prior years and relative to its competitors for the benefit of all shareholders.
Influencing or attempting to influence legislative action or non-action through oral or written communication.
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:
Please contact Aletta Boshoff to consider your organisation’s ESG maturity.