ESG Reporting Fundamentals: The Three Factors and What They Mean
ESG is short for Environment, Social and Governance. Often used interchangeably with sustainability reporting, it relates to a set of factors defining corporate responsibility. Let’s look at what each of these factors mean in the context of reporting.
Environment
The "Environment" component is centered around assessing a company's impact on the natural world. It involves evaluating the organization's efforts to mitigate environmental impact, protect biodiversity, promote sustainable resource management practices, and reduce their carbon footprint. Some key metrics that fall under this category include:
- Greenhouse gas emissions
- Energy consumption
- Water usage
- Waste management and recycling
- Compliance with environmental regulations
- Setting emission reduction targets
Social
The "Social" part of ESG is about the company’s treatment of people. This can be about a company's impact and treatment of its stakeholders, including employees, communities, customers, and suppliers. It focuses on the social well-being, human rights, labor practices, diversity and inclusion, product safety, and community involvement of an organization. Some key metrics that might come under the "Social" part of ESG include:
- Workforce diversity and inclusion metrics
- Labor standards compliance
- Occupational health and safety records
- Supplier code of conduct adherence
- Community investment and philanthropic activities
- Human rights policies and practices
Governance
Governance is one of the key components of the environmental, social, and governance (ESG) framework. It refers to the way a company is directed, controlled, and manages its operations. Good governance focuses on promoting ethical behavior, transparency, accountability, and effective decision-making processes within an organization. It aims to ensure that the interests of shareholders, employees, communities, and other stakeholders are adequately represented and protected. Some of the key metrics that fall under the governance component of ESG include:
- Board composition and oversight
- Executive compensation
- Ethics and anti-corruption policies
- Stakeholder engagement and rights
- Business ethics
- Transparency and reporting
- Compliance and regulatory adherence
Monitoring and evaluating these governance metrics can provide insights into the strength and effectiveness of a company's governance practices, which is crucial for investors and stakeholders to make informed decisions and promote sustainable business practices.
