Environmental, social, and corporate governance (ESG) refers to the set of standards measuring a business' impact on the environment, and society as well as how transparent and accountable it is. This is basically a standard used to evaluate a business's performance with regard to the environment and society in which it operates. ESG measures how businesses integrate environmental, social, and governance practices into operations as well as the business models and their impacts.
For any business to thrive in this century, it must have ESG incorporated into its operations. Each of these aspects of ESG has different ways of being evaluated;
The environmental aspect of ESG focuses on how businesses minimize their environmental impacts. Some of the environmental practices that businesses are expected to implement to achieve this are reducing energy and using renewable energy for production to become net zero companies (having the least greenhouse gas emissions). Developing greener products are services, reducing carbon emissions, to mention but a few. A company is expected to have such environmental policies so as to run sustainably.
Socially, companies are evaluated on the impacts they make and the business environment they create. Companies can positively contribute to fairness in society and invest in equal opportunities and conditions for employees and communities. When evaluating, companies are expected to have certain practices, not limited to ensuring products and services are safe for communities, customer data is safe, and promoting equality in their workplaces.
Governance is the third aspect of ESG and it basically focuses on how the companies make decisions, make reports, and the logistics of running the companies. It analyzes the company's ethical behavior and transparency with stakeholders about its activities. Some of the governance practices that a company is expected to have are; accurate reporting to shareholders on financial practices, business strategy, and operations, undertaking business ethically, such as preventing bribery, ensuring diversity in any leadership team; and being open about executive pay.
A company that wishes to develop and expand sustainably ought to incorporate ESG in its operation structures for several reasons, not limited to; ESG helps to lower and reduce losses and risks. This is often an outcome of the environmental policies the company enacts such as the use of renewable energy. The standard also helps companies' reputation as it indicates there are transparent plans that focus on conserving the environment, protecting, supporting diversity and equality in society, and ensuring ethical business decisions and operations.
Companies should also integrate ESG in order to attract employees and consumers. People will often choose to be employed in a company that promotes diversity and equality in their workspaces and also protect the well fare of their workers. Consumers have also joined the trend of ESG and would prefer to have products and services from companies that produce products that are renewable and ones that don't have side effects on them, on the other hand, they would also prefer to procure services from companies that protect their data by all means. For a company to sustainably develop, they definitely need consumers.
One of the most important things or objectives for companies is to expand and realize profits, companies will adopt the outside investment approach to this. For companies to be able to get investors, they should have buy-in for such investors. With the recent trend of ESG, most investors prefer to invest in companies that show effective incorporation of ESG in their operations. In the PwC 2021 Global Investor report survey, it was reported that companies failing to integrate ESG risk losing investors. This is because investors want sustainable long-term value for their shareholders and stakeholders. According to the US SIF Foundation's 2020 trends report, U.S. assets under management using ESG strategies grew to $17.1 trillion at the beginning of 2020. That's a 42% increase from $12 trillion at the beginning of 2018.
In Africa, not so many jurisdictions have set up legal frameworks to govern ESG one of the reasons being that it is a new concept in the business world in Africa. However, all African jurisdictions have legal frameworks that govern corporate affairs. Through these legal frameworks, they have been able to set out some regulations as to how companies should operate and ensure the environment and society in which they operate don't have any negative impacts. Some countries, like South Africa, have a specific legal framework that governs the ESG and has been put in place to ensure that it is implemented.
Despite that there aren't so many jurisdictions with the legal framework drafted for ESG companies can still be sued for none implementation of ESG and there has been binding precedence that has been set from decided cases against companies that have not had effective ESG, examples of such are, the case of Jonah Gbemre V Shell PDC ltd and Ors (Civil_case _313 of 2000) where the The The Nigerian Federal High Court held that a right to life includes a right to clean and poison-and-pollution free environment. The court restrained the respondents from flaring gas and ordered them to take appropriate steps to stop further gas flaring. Royal Dutch Shell, one of the world's six super major oil companies, announced that it would pay NGN45.9 million to settle a decades long legal dispute concerning the oil spill that occurred in the Biafran civil war.
There has also been the establishment of regulatory bodies that are tasked with ensuring ESG implementation. Not all jurisdictions have these bodies, but among these is Nigeria's National Technology Development Agency, one of its tasks is to ensure ESG is well implemented. The agency recently fined a technology company; Soko Lending Company, NGN10 million for abuse of personal data and breach of privacy.
Companies that want to expand and develop in their business must consider ESG as an important aspect of their operation and make sure to implement each of these aspects effectively because of the impacts it has on them corporately and legally.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.