Sustainability and ESG: the new corporate governance?
There is increasing pressure on businesses to ensure that their operations are fully sustainable and comply with Environmental, Social and Governance (ESG) standards. This pressure comes from various sources including Government, international agencies, customers, shareholders, pressure groups and investors. However, despite the increasing need for awareness and action, many people are still unclear about what these terms mean.
So let’s try to explain…
What is sustainability?
In 1987 the World Commission on Environment and Development (WCED) commissioned a report by the former Norwegian Prime Minister Gro Harlem Brundtland. This described sustainability as:
"Meeting the needs of the present without compromising the ability of future generations to meet their own needs."
The WCED sought to explore the causes of environmental degradation and attempted to understand the interconnections between social equity, economic growth and environmental problems. The aim was then to develop policy solutions that integrate all three areas.
This has driven the desire for broader action and reporting, for example triple bottom line accounting, which encourages companies to report on their environmental and social performance as well as the usual financial/economic measures.
What is ESG?
The term ESG was coined from discussions at the UN Who Cares Wins conference 2004. It codified the behaviour expected of companies who claim to be good corporate citizens.
Putting a sustainable purpose at the heart of an oranisation, ESG criteria potentially help investors to screen companies in which they may consider investing. The standards examined include the environmental impact of a company’s activities and the relationships in the area in which they operate. This particularly includes relations with employees, suppliers, customers and the wider community.
They also look at the company’s leadership and governance around the way a company is run, including the following:
- Vision Purpose Values
- Sustainable Business strategy
- Transparency on Executive pay
- Shareholder rights
- Internal controls
The new corporate governance?
Corporate governance expert and author Professor Bob Garratt, puts it like this…
"The underlying principle is that no organisation is a truly independent entity with an unlimited right to do what it likes with its people, resources, the environment or the communities in which its stakeholders live."
The movement towards sustainability and ESG reporting is seemingly irresistible so it is important to understand what it is and how it can help your business.
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