What is ESG?
ESG is a term that describes sustainability under the three pillars: Environmental, Social, and Governance. ESG stands as an approach to evaluate to which extent an organisation attempts to look behind its direct profit maximisation, but also to reflect the broader effect on stakeholder welfare. However, at the day-to-day management team operations level, ESG means many things to a business, and every business is unique, with a different ESG strategy. Here, your ESG questions are explained in 60 seconds.
What is ESG Rating?
An ESG (Environmental, Social, Governance) rating measures a company's exposure and risk to ESG factors. There is a broad scale of ESG rating agencies, using non-harmonised ESG methodologies with which to score companies on their ESG performance. The ESG score any company is given can thus depend on the particular methodology used and can vary among the rating agencies. In the KnowESG Company Profiles section we have selected the three most prominent ESG metrics and ratings - Sustainalytics, Refinitiv, and MSCI - to showcase the sustainability performance of selected companies.
There are different ratings approaches simply because companies have different structures and needs, and no single ratings system adequately captures the full breadth of ESG information. At KnowESG, we are developing a comprehensive listing of not just major corporates, but also SMEs, to give you insight into where companies are making progress with ESG ratings from varying indices, and via the most recent company sustainability reports. Follow this link to start browsing.
What is ESG investing?
Also known as socially responsible investing, sustainable investing, or impact investing. An ESG investor typically seeks a balance between the financial performance (ROI - return on investment) and the ESG performance of ESG funds, and ESG ratings play a significant role in evaluating companies' non-financial performance. Opting for an ESG investing vs. a 'non-ESG' stock also may not provide, in general, a huge difference in performance. In fact, both choices tend, on average, to perform similarly.
However, if that is the case, then it demonstrates how following an an ESG data-driven investment strategy, based on whichever ESG criteria or defined ESG risks, means that companies can continue to perform to expectations while actually doing measurable 'good', a purpose statement of shifting operations towards mitigating the issues associated with anthropogenic climate change.
Additionally, ESG strategy means investment choices that work over the long-term. Sustainable investing is just that, sustainable. It continues. Similarly, as companies build growth around ESG considerations, develop better ESG ratings and ESG targets, and place environmental, social, and governance investing at the heart of their corporate strategy, they will see compound growth across these areas that benefits the business, improves current investor relations and corporate structure, reduces risk, and attracts institutional investors and other stakeholders due to increased stability.
What is sustainable finance?
Sustainable or green finance is the set of financial regulations, standards, norms and products that pursue an environmental objective, and in particular to facilitate the energy transition. It allows the financial system to connect with the economy and the population by financing its agents while maintaining a growth objective. The long-standing concept is promoted with the adoption of the Paris Climate Agreement, which stipulates that parties must make "finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development."
There is plenty of discussion about what merits 'sustainable', but it may be more helpful to visualise in terms of how much 'commitment' is overtly displayed towards climate mitigation initiatives. Check out below video demonstrating how, when tacked to the UN SDGs, we can at least categorise commitment, then scale it from 'financing' to 'philanthropy'.
What are SDGs?
The Sustainable Development Goals (SDGs) or Global Goals are a collection of 17 interlinked global goals designed to be a "blueprint to achieve a better and more sustainable future for all". The SDGs were set up in 2005 by the United Nations General Assembly and are intended to be achieved by 2030. Perhaps the most effective way to consider the SDGs in the context of business is that "all our jobs are now sustainability jobs".
The goals are necessarily comprehensive, distilled as far as possible to capture the fundamental range areas where sustainability must be implemented. This makes the SDGs indispensable for business, simply because they can always be used as a reference point where ESG strategies and priorities need to be made. The SDGs connect the overarching world of climate regulation, treaties and geopolitics, with the day-to-day of any kind of company. Check out the below video from the World Business Council for Sustainable Development (WBCSD).
What are green bonds?
Green bonds are fixed-income financial instruments that are used to fund projects that have positive environmental and/or climate benefits.
Generally, some aspect of the bond- interest rate or restrictive covenant - kicks in if a business (or another issuing party) does not meet its sustainability targets specified in the green bond. However, there is usually no financial consequence of not meeting the targets. Green bonds may carry tax incentives as well. In 2020, the total issuance of green bonds was worth almost $270 billion, according to the Climate Bonds Initiative, who have created a solid explainer video as shown below.
What is an ESG framework?
The framework for assessing the impact of the ESG practices of a company. And by impact, we also mean 'risk'. Environmental practices carry direct risk, such as polluting or degradation of habitat; indirect risks can be inaction or existing climate-related factors.
As part of an overall ESG strategy, companies can actively reduce resource use and emissions, improve current energy effectiveness, and switch to renewables to reduce environmental risks. Social practices carry reputation risk, especially if inaction or failure to address issues leads to poor public sentiment; regulatory risk is simply the violation of existing regulations, such as employee mistreatment, harassment, violation of working and hygiene conditions. Governance issues can be legal, financial, and reputational, and likewise follow when the regulations in place in these areas are abused, resulting in the potential for legal action, financial or reputational loss.
In reality, there are numerous mandatory and voluntary frameworks that are used in the context of ESG or sustainability reporting. Depending on the geography, type of organisation, or industry, several methodologies may apply. These could, for example, be commercial and specific, as with MSCI, or as overarching guidance, such as with the UN SDGs. See our summary below on the most relevant approaches to ESG reporting. We found below video helpful as an overview.
What are GRI standards?
Global Reporting Initiative (GRI) Sustainability Reporting Standards are the most commonly accepted global standards for company sustainability reporting. GRI standards were developed to enable consistent reporting across companies and industries, providing clearer communication to stakeholders regarding sustainability matters and corporate governance. GRI standards are available for reporting across a wide range of ESG-related topics, ranging from anti-corruption practices to biodiversity and emissions.
What is the EU taxonomy?
The EU taxonomy for sustainable activities is a classification system established to clarify which investments are environmentally sustainable in the context of the European Green Deal. The aim of the taxonomy is to prevent greenwashing and to help investors make greener choices. It introduces disclosure under 6 criteria: climate change mitigation, climate change adaptation, the sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems. For a further walkthrough of the system, take a look at this Reuters explainer.
What is SFDR regulation?
The Sustainable Finance Disclosure Regulation (SFDR) is a European regulation introduced to improve transparency in the market for sustainable investment products, to prevent greenwashing and to increase transparency around sustainability claims made by financial market participants. Here is a clear explainer on SFDR by Nordea Funds.
What are SASB standards?
The Sustainability Accounting Standards Board (SASB) is a non-profit organisation, founded in 2011 in the US to develop sustainability accounting standards. SASB represents the ESG guidance framework that sets standards for the disclosure of financially material sustainability information by companies to their investors. It focuses on quantifying and reporting the outward material ESG issues, impacts and risks of an organisation's performance across 77 different industry standards, which are visualised graphically here. A quick, presentation-style overview helps define materiality and everything you concisely need to know on SASB here.
What is CDSB?
Headquartered in London, the Climate Disclosure Standards Board (CDSB) was a non-profit organisation working to provide material information for investors, stakeholders, and financial markets through the integration of climate change-related information into mainstream financial reporting. It formed a foundation for the Task Force for Climate-Related Financial Disclosures (TCFD) recommendations and sets out an approach for reporting environmental and social information in mainstream reports, such as annual reports, 10-K filings, or integrated reports. The International Financial Reporting Standards (IFRS) consolidated the CDSB in June 2022 to continue to supply high-quality climate and sustainability disclosures to global financial markets. An overview of this multi-pronged consolidation is available here.
What is TCFD?
The Task Force on Climate-Related Financial Disclosures (TCFD) provides information to investors about commercial risk management: what companies are doing to mitigate the climate risks; as well as be transparent about the way in which they are governed. It addresses how climate change might impact future financial performance and the organisation's ability to create value, and develops consistent disclosures for company use when advising investors and stakeholders. Check out this video by S&P for a concise overview of the TCFD final recommendations.
What is Integrated Reporting ?
Integrated Reporting (IR) is a framework for corporate reporting in which corporate financial and sustainability information are integrated into one report. An integrated report includes material information about ESG strategy, governance factors, and a company's ESG performance.
As such, it is an important tool in improve the understanding of the relationship between financial and non-financial factors that determine a company's performance and how it creates sustainable value in the longer-term. Since IR sits at the core of a company's ability to define exactly how its ESG program is viable as both an operational direction as well as its bottom line, the International Integrated Reporting Council (IIRC) explains everything you need to know.
What are PRI principles?
Principles for Responsible Investment (PRI) is a UN-supported international network of investors founded in 2006, working together to implement its six principles:
Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
Principle 6: We will each report on our activities and progress towards implementing the Principles.
What is sustainable crypto?
A sustainable crypto currency is one with low energy consumption and a minimal carbon footprint. It doesn't require vast amounts of energy to power its transactions and is constantly working on reducing its environmental impact. The community of such a currency is dedicated to organising various eco-initiatives. In practical terms, this means guaranteeing that the energy sources used to power the algorithms for 'mining operations' are renewable. In 2020, Bitcoin activities alone used more energy than Argentina, underlining how the quest to digitise and securitise our financial world comes in the guise of a gold rush fueled by fossils. The World Economic Forum (WEF) has a helpful piece on this, with links to further reading.
What is cleantech?
Clean technology, in short cleantech, refers to any technological solutions developed with the goal to reduce negative environmental impacts. The term typifies a growing class of 'green' technologies, such as renewables (solar, wind, tidal, hydro, geothermal, etc.), biofuels, resource-saving solutions, and many, many more emerging approaches.
Perhaps it's more logical to consider 'clean', and that it denotes how the vast majority of industrial processes and technologies we have developed to power our world and structure our societies have been overtly, environmentally destructive, thus 'dirty'. A quick explainer is available here.
With the growing use of the mantra "all our jobs are sustainability jobs", we can begin to envision how, whichever sector of the economy we operate in, there are always opportunities to improve things away from 'destructive' to the paradigm of 'sustainable', and even better, 'restorative' or 'regenerative'.
To make things simple, we highly recommend that you start with the work that Project Regeneration is driving, its Nexus initiative details the breadth of clean technologies and clean approaches that are experiencing both huge evolution and investment.
What is ESG tech?
Similar to cleantech, ESG tech solutions reduce negative environmental impact. The notional difference is that they also offer solutions under the other two pillars of ESG - social & governance. As such, ESG tech products and services can offer solutions in the areas of governance reporting, cybersecurity, diversity, access to finance, access to healthcare, etc.
'Technology' can mean more than digital, writing systems are 'technologies' too, as are methods of communication, and the rules that govern interactive processes are all 'technology'. In this sense, 'ESG Tech' can denote the systems we develop to track and capture the progress we make in the transition to sustainability and beyond. In this sense, ESG Ratings systems are also 'tech'.
The definition of 'ESG Tech' should remain open to interpretation, so that each of us can define it as befits our particular circumstances. The point is that our global, civilisational, cultural and economic systems begin to incorporate such technological aspects, so that we re-orient away from our current, destructive approaches, towards regenerative models of interaction. Again, follow both Project Regeneration and also Project Drawdown to get a wide-lens view of the sheer diversity of creative energy that is driving real change in ESG Tech.
What is the Paris Agreement?
The Paris Agreement, also referred to as the Paris Accords of the Paris Climate Accords, is an international treaty on climate change adopted in 2015. It covers climate change mitigation, adaptation, and finance. Its objective is to limit the global temperature increase in this century to below 2 degrees Celsius above pre-industrial levels, and to work toward limiting the increase to 1.5 degree Celsius.
Specifically, the Agreement provides several key action points: 1. Substantially reduce global greenhouse gas emissions to limit the global temperature increase in this century to 2 degrees Celsius while pursuing efforts to limit the increase even further to 1.5 degrees; 2. Review countries’ commitments every five years; 3. Provide financing to developing countries to mitigate climate change, strengthen resilience and enhance abilities to adapt to climate impacts. Read more on the Paris Agreement here.
What is ESG Reporting ?
ESG reporting refers to the practice of publicly reporting a company's environmental, social, and governance (ESG) performance and initiatives. ESG reporting typically includes information on a company's environmental impact, such as greenhouse gas emissions and waste management, as well as its social impact, such as labour practices and community engagement. Governance-related factors, such as board composition and executive compensation, may also be included in ESG reporting. The purpose of such ESG initiatives and reporting is to provide transparency and accountability to stakeholders, such as investors and customers, regarding a company's sustainability and responsible business practices.
What is renewable energy ?
Renewable energy is energy generated from natural, renewable resources that are replenished over time, such as sunlight, wind, water, and geothermal heat. Renewable energy is considered clean and sustainable because it does not emit greenhouse gases and does not deplete natural resources. Investing in renewable energy can help reduce dependence on fossil fuels and contribute to a low carbon economy.
ESG reporting includes information about a company's investments in renewable energy, as well as the potential environmental and social impacts of those investments. Companies may also include information about their efforts to reduce emissions from their operations, shift to cleaner production methods, or implement energy efficiency policies by using renewable resources.
What does carbon footprint mean?
A carbon footprint is a measure of the total amount of greenhouse gas emissions (primarily carbon dioxide) produced by an individual, organisation, event, or product, expressed in equivalent tons of CO2. A carbon footprint is calculated by considering all emissions from sources such as burning fossil fuels for transportation and electricity, industrial processes, and deforestation. The total emissions are then compared to a standardised unit of measurement, such as a tonne (1,000 kilograms) of CO2. By understanding and reducing an organiation's carbon footprint as part of effective ESG practices, companies can become more sustainable and reduce their environmental footprint.
What does greenwashing mean?
Greenwashing occurs when a company or organization attempts to portray itself as environmentally friendly or using sustainable practices, while doing nothing to minimise its environmental effect, all while its actions harm the environment. It is essentially a marketing technique aimed at creating an illusion of ecological and ethical responsibility, of claiming ESG standards as part of a greater sense of corporate social responsibility.
Companies may use greenwashing to make their operations seem more environmentally conscious than they actually are. Examples of greenwashing include: advertising a product as 'green' without proof of being so; making unsubstantiated claims about environmental benefits; or using misleading labels and packaging to imply environmental friendliness.
What is climate adaptation?
Climate adaptation involves adjusting to to both the current and projected impacts of climate change. The objective is to lessen our vulnerability to the negative consequences of climate change. It also includes making the most of any potential beneficial opportunities associated with climate change.
Examples of adaptation strategies include improving infrastructure, increasing water storage and efficiency, managing land use to increase resilience to climate change, and investing in renewable energy sources. Adaptation also requires us to consider the possible impacts of extreme weather events like floods and storms, as well as long-term changes in temperature and precipitation patterns.
What is climate mitigation?
Climate mitigation involves reducing the flow of heat-trapping greenhouse gases into the atmosphere, either by reducing sources of these gases or enhancing the ‘sinks’ that accumulate and store these gases. Mitigation might include employing new technologies and renewable energies, retrofitting aging equipment to be more energy efficient, or modifying management procedures and customer behaviour.
By reducing the sources of GHG emissions, it may be possible to slow down global heating to a certain extent, opening up the time required to develop more resilient mitigation strategies. Since mitigation activities are necessarily ESG activities, most companies can, with ESG-led thought leadership, create socio-economic benefits by creating jobs and improving public health, while involving stakeholders in business issues related to climate and reducing exposure to climate risks.
What is net zero ?
‘Net zero’ is a term used to describe a balance between the amount of emissions produced and the amount removed from the atmosphere. It means achieving a state where the emissions of greenhouse gases are equal to the amount removed or offset, resulting in no net increase in the concentration of greenhouse gases in the atmosphere. Achieving net zero emissions is a key goal of reducing global warming, as it ensures that international collaborative progress is being made that defines measurable impact, and ultimately that regulatory bodies are effective in implementing the legal requirements to accurately monitor a company's operations.
What is the greenhouse effect ?
The greenhouse effect is a natural process that occurs when certain gases in the Earth's atmosphere, known as greenhouse gases, trap and retain heat from the sun. These gases, including carbon dioxide (CO2), methane (CH4), and water vapor (H2O), act like the glass walls of a greenhouse, allowing sunlight to pass through while trapping heat inside. This natural process helps to keep the Earth's surface warm and habitable, with an average temperature of around 59°F (15°C). However, human activities that release large amounts of greenhouse gases, particularly CO2 from the burning of fossil fuels, are causing an increase in the concentration of these gases in the atmosphere, leading to an enhanced greenhouse effect and resulting global warming.
What does DEI mean ?
Diversity, Equity, and Inclusion (DEI) refers to the attitudes, beliefs, values, and behaviours that promote respect, fairness, and equal treatment for all individuals, regardless of their race, ethnicity, gender, sexual orientation, age, ability, or any other ‘protected characteristics’. A positive DEI climate fosters a sense of belonging, transparently upheld tolerance of racial diversity, and encourages individuals to bring their authentic selves to the workplace, creating a more inclusive and diverse environment. Positive DEI indicates that business leaders put human rights, not just 'Human Resources', at the centre of business issues.
What are ESG funds ?
ESG funds are investment funds that prioritise companies with strong environmental, social, and governance (ESG) and financial performance. These funds seek to achieve both financial returns and positive social or environmental impact by investing in companies that are deemed to have sustainable and responsible practices. ESG funds are seen as a way for investors to show their support for public companies that promote diversity, inclusion, and ethical practices. They also provide an opportunity for investors to diversify their portfolios and reduce risk while investing in companies with strong DEI initiatives.
Ultimately, they offer a way to make positive investments that align with the investor’s values. ESG funds can also be beneficial to companies, as they are often rewarded with above-average returns and better access to capital. By investing in businesses that meet certain criteria for sustainability or corporate responsibility, investors can help those businesses evolve their existing frameworks to become more accountable and support greater transparency in corporate governance. Ultimately, this could lead to a positive impact on the world at large.
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