ESG is an acronym that stays for Environmental, Social and Governance. This three ESG components together refer to an approach derived from the “Triple Bottom Line” concept of “People, Planet and Profits” (PPP), introduced in the 1990s by the author John Elkington.
The idea presented with this concept is quite simple: companies are more likely to succeed if they create value and become profitable not only for the owners but for everything surrounding them i.e. employees, customers, suppliers, environment and society. According to this concept, companies should not only focus on the “Profits,” but also on the other two P’s, which are crucially important for the sustainability of any business.
Over the years, this concept has evolved into what we are now used to call the ESG factors, which are now considered the cornerstone of Sustainable and Responsible Investing, better known by the acronym SRI. These criteria are best characterized as a framework that helps stakeholders to understand how an organization is managing risks and taking opportunities related to environmental, social, and governance criteria.
Nevertheless, on what do these three criteria concretely focus on?
Environmental criteria refers to an organization’s environmental impact(s) and risk management practices. These include greenhouse gas emissions, stewardship over natural resources, and the firm’s overall resiliency against physical climate risks (like climate change, flooding, and fires).
The social pillar refers to the relationship between stakeholders, company, and community. Examples of a firm that respects these criteria is having fair wages but also a positive social impact on the communities in which the company operates. Often environmental and labor standards are not met in supply chain partners, particularly when located in developing countries.
Governance mainly refers to the company’s management and its culture. The concept of governance focuses on promoting and improving modern corporate mechanisms. Topics include corporate board composition, cybersecurity, management structure, executive compensation, and corruption prevention.