Environment Social & Governance (ESG)

Financial Times defines Environment Social & Governance (ESG) as “a generic term used in capital markets and used by investors to evaluate corporate behavior and to determine the future financial performance of companies.” ESG is a set of standards and metrics used to help measure risk for investors, rating agencies, customers and regulatory agencies.

ESG is being driven in part by a variety of external and internal stakeholders including employees, individual investors, customers, policy leaders and NGOs.  Additionally, financial institutions and investment funds are driving the move to ESG, and making it a key priority in its evaluation process.  It is a metric that is an important part of all risk assessments for all interested parties.

Blackrock, one of the largest financial institutions, has made ESG one of their top priorities.  It is addressed in the company’s 2020 Letter to Clients. Blackrock states, “In heightening our scrutiny on ESG issues, we are continuously evaluating the risk-return profile and negative externalities posed by specific sectors as we seek to minimize risk and maximize long-term return for our clients.”

ESG is an essential part of a company’s business plan and an important part of the company’s DNA.  It is integrated into every part of a company and is a critical part of the risk management process which includes a reporting and auditing program.  The reality is that ESG is helping to drive and increase value for the enterprise.

In simple terms ESG is:

Environmental: how the actions of a company’s operations impact the environment.

Social: how a company engages with key stakeholders including employees, suppliers, customers, and the communities in which they work.

Governance: a company’s internal controls including legal compliance, regulatory and how management works with internal and external stakeholders.