If you have ever wondered why the concept of "ESG" is so popular among investors and business owners, it is because it refers to a variety of issues that might affect a company's potential to generate long-term value. ESG refers to a set of Environmental, Social, and Governance elements used to assess investment and company impact. At its most basic level, ESG is a method for evaluating organizations against a wide range of socially acceptable outcomes. It refers to a set of criteria for assessing the non-financial effects of specific investments and businesses. Simultaneously, ESG offers a variety of business and investment prospects.
Let us examine the individual components of Environmental, Social, and Governance elements: The 'E' in ESG stands for environmental criteria, which include the amount of energy an organisation consumes and wastes, the resources it requires, and the effects for living beings as a result. Pollution, deforestation, and garbage management are just a few examples of environmental factors.
Every business must work in a larger, more varied society and assess the social impact of its business – the 'S' criteria. Social factors to consider include employee relations, labour rules, diversity and inclusion and product safety.
The 'G' refers to a company's internal system of processes, controls, and procedures for governing itself, making effective decisions, adhering to the law, and meeting the needs of external stakeholders. You can consider Environmental, Social, and Governance elements an intangible asset to a company. It is therefore important that companies understand ESG, its importance and potential implications and benefits for their businesses.
Why you need to pay attention to ESG
ESG investing dates back to the 1960s when investors decided to eliminate stocks or entire industries from their portfolios due to company activities such as tobacco production. In recent times, there has been an increased focus on ESG in various countries. In Nigeria, the Financial Reporting Council (FRC) issued the Nigerian Code of Corporate Governance (NCCG) in 2018, with Principle 26 aimed at improving sustainability. It requires organisations to pay adequate attention to sustainability issues including environmental, social, occupational and community health and safety; to ensure successful long term business performance and project the company as a responsible corporate citizen, contributing to economic development. As such, introducing an Environmental, Social, and Governance program can aid companies in complying with the NCCG.
Investors are increasingly recognising the link between ESG performance, wealth generation, and risk mitigation. A successful ESG program can not only help companies and investors address sustainability issues but may also help them gain access to vast pools of capital, strengthen their company identity, and encourage long-term growth. If appropriately managed, ESG can help companies capture opportunities, manage risk by staying ahead of the vulnerability curve, and generate business and financial out-performance. It stands to reason that businesses that perform well in terms of ESG are more efficient and less wasteful; they have a higher level of staff dedication and productivity.
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.
