What is ESG? Why is ESG important today?
Sustainable investing is an investment trend that both individual and institutional investors around the world are focusing on, especially in the midst of the escalating climate change crisis. Investment is no longer solely about profit. Environmental considerations, social responsibility, and governance management must also be taken into account. This aligns with the concept of business operations that emphasize sustainability. This involves considering environmental performance (Environmental), society (Social), and governance (Governance), collectively known as “ESG”.
What are ESGs?
ESG represents the sustainable development concept of an organization. It goes beyond just seeking profit, emphasizing three main factors: environment, society, and governance (Environment, Social, Governance: ESG). Currently, ESG is a popular investment trend worldwide. Investors often use this concept when considering investment opportunities because businesses with strong ESG values tend to reflect competitiveness and long-term growth potential.
Environmental concerns arise from business operations, which often utilize natural resources and impact the environment. Every business, to some extent, contributes to environmental harm. The challenge is to manage natural resource usage efficiently and minimize the negative impacts of business operations on the environment. This can be assessed using environmental indicators such as greenhouse gas emissions, waste generation, paper and electricity reduction, recycling, and energy conservation.
Social issues pertain to the relationship between a company and its internal and external stakeholders, including employees, customers, local communities, and those involved in the value chain. Businesses with strong stakeholder relationships tend to operate more smoothly and gain customer trust. Social indicators might include workforce well-being, fair compensation, adherence to human rights principles, labor equality, opportunities for disabled individuals, and employee health and safety.
"G" Governance (Corporate Governance)
Governance relates to transparency in business operations. This encompasses policies on anti-corruption and due diligence towards all business stakeholders. It can be assessed from operational transparency, organizational culture, rules, regulations, remuneration sharing policies, tax management, executive structure, executive and board diversity, cybersecurity, honest policy and procedure disclosure, and actions to combat fraud and corruption. Every operational step should be transparent, fair, and verifiable.
How important is ESG?
In the past, most investors primarily sought businesses with high profits. However, many asset management analysts now recommend investing in ESG-focused firms, suggesting that such firms, which operate sustainably, will yield better long-term returns than purely profit-driven ones. Surveys from various countries support this, indicating that sustainable investment is gaining traction in the market. Investing in ESG-focused businesses aligns with sustainable investment, demonstrating sustainable development driven by investments that have positive impacts. Businesses can be managed systematically and to high standards without solely focusing on operational results. Thus, in the near future, companies that effectively address crucial ESG factors will likely outperform their competitors.
What is ESG Risk?
ESG risk pertains to challenges related to “ESG” issues. It's a challenge for organizations to manage these risks to create opportunities and mitigate threats that might affect profitability, competitiveness, reputation, and organizational survival. This involves integrating sustainability risk management from mission setting and corporate strategy development to risk analysis concerning sustainability at various levels, ensuring stakeholder confidence.
Environmental ESG Risk
- Climate change impacts on product design, services, or raw material procurement.
- Effects of water scarcity on production or service processes.
- Rising costs due to taxes on sectors or businesses emitting carbon dioxide (Carbon Tax).
- Construction sites with environmental risks affecting nearby communities.
- Material choices that negatively impact society, the environment, or pose safety risks.
Social ESG Risk
- Human rights violations within the supply chain.
- Changes in population structure.
- Evolving societal lifestyles.
- Geopolitical risks influencing investment decisions.
- Opposition to factory construction near communities.
Corporate Governance ESG Risk:
- The organization's failure to disclose material information that stakeholders expect.
- Shortcomings in internal regulatory measures.
- Risks associated with investing in countries plagued by corruption.
- Failure to comply with regulations such as environmental impact assessments (EIA).
- The choice of non-standard construction materials, leading to non-approval from government agencies.