What is ESG and what does it mean for you?
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The acronym ESG has recently become more and more common in business circles. Therefore, we have decided to write up this short article to help you understand what ESG is and what it means for business relationships.
The acronym ESG (Environmental, Social, and Governance) refers to the new requirements in the field of social responsibility, corporate governance and environmental sustainability. ESG is de facto an assessment of a company’s social responsibility in the area of social and environmental factors. These three broad categories are used to define “socially responsible entrepreneurs”, i.e. entrepreneurs who consider the inclusion of their values and concerns important (such as environmental protection, corporate governance or community interests).
PRACTICAL IMPLICATIONS FOR COMPANIES
Financial institutions, investors, business partners, other stakeholders, and the public correctly view ESG as a potential risk for companies that may not comply with these standards. The legal, financial and reputational risks and negative impacts associated with non-compliance with these standards can in many cases complicate the situation not only for the company that does not follow them in a sufficient manner, but also for other companies with which they do business.
We have recently come across specific ESG requirements, particularly in the area of public procurement, where our clients, especially those based in western Europe, have increasingly started to require some form of ESG certification or proof of sustainability risk management of service & supply providers.
What are then the areas of ESG? ESG is comprised of three main categories, which are further divided into sub-categories.
- E – Environment. Evaluation criteria targeting environmental topics, including, for example, what resources are used – raw materials, emissions, level of innovation. The company’s environmental impact.
- S – Social. Criteria focusing on assessment of the level of social responsibility of a given company. These criteria include, for example, an assessment of working conditions, how the company approaches respect for human rights, the impact of the company’s production on society.
- G – Governance. A criterion targeting the way a company is governed, emphasizing internal controls and procedures (usually established by various standards, such as ISO, and their implementation), the responsibilities of suppliers and the management of the company as a whole.
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