If you’ve recently heard the acronym ESG, you may have been impressed and thought it was a major innovation, but don’t be deceived so easily—this acronym is an evolution of sustainability principles that have been in existence for quite some time.
What Does ESG Mean?
The acronym ESG stands for Environmental, Social, and Governance, representing best practices in these areas. In essence, a business is considered ESG when it minimizes its environmental impact, takes actions to promote social justice, and maintains good management practices.
This doesn’t mean that overnight we have managers embracing environmental causes and being super sustainable, but it is indeed a step forward in evaluating companies based on their impact in these three areas.
In the sustainability world, ESG is the new trend, the “buzzword” especially when it comes to impact investing. Sustainability has become more relevant across various market sectors, particularly in terms of impact investments. For example, a Google search for “ESG” yields mostly results related to investment companies.
In this quick example, you can see that the first three search results are sponsored links from Bloomberg, S&P, and Genial Investimentos, while the first organic search result is from XP.
I’ll talk a bit more about this, but first, let’s understand the origin of the ESG acronym.
Origin of the ESG Acronym
One could say that the ESG acronym emerged in 2005 in the report “Who Cares Wins,” developed by a UN-led initiative. However, even though the term appeared about 16 years ago, it took some time for it to gain prominence and become the relevant term of the moment.
The journey is likely much longer than that and has been gaining strength with significant moments in global sustainability debates. To provide a brief chronology of significant sustainability events leading to the ESG acronym:
- Perhaps one of the initial milestones was the 1972 Stockholm Conference with discussions on eco-development.
- The Brundtland Report in 1987 defined the concept of sustainable development.
- In 1992, we had the Earth Summit, the UN conference on the environment and development.
- The triple bottom line (environmental, social, and economic) created by John Elkington in 1994.
- The Kyoto Protocol approved at Rio+5 in New York in 1997.
- The “Who Cares Wins” report in 2005 brought banks and investment companies closer to key sustainability concepts.
- More recently, in 2015, the UN Sustainable Development Conference approved the 2030 agenda and Sustainable Development Goals (SDGs).
You can see that it’s not an innovation, but a constant evolution and an ongoing struggle for a more sustainable future amid unprecedented destruction in the present world.
But let’s not delve into a (deserved and fair) critique of our consumerist, unsustainable, and destructive society at this moment. Let’s understand more about the positive aspects of ESG and what companies need to consider to be labeled as such.
Understanding the 3 Factors of the Acronym
These are the three factors of the ESG acronym:
Environmental:
- Carbon footprint
- Global warming
- Air and water pollution
- Biodiversity
- Deforestation
- Renewable energy
- Waste management
- Water scarcity
Social:
- Working conditions
- Customer satisfaction
- Team diversity
- Employee engagement
- Community relations
- Product safety and quality
Governance:
- Board and Council composition
- Corporate conduct
- Relations with government entities and politicians
- Business ethics
- Financial solidity
- Existence of a whistleblower channel
Investments and Sustainability
This seems very much like a trend in the investment sector to give more visibility to certain companies. The topic is extremely relevant, and it’s great to see companies engaging in increasingly sustainable practices. Still, one can’t turn a blind eye to the “need to differentiate” from other businesses by claiming to be “ESG.” It somewhat reminds me of the term “greenwashing” that I first heard about almost two decades ago during my tourism college days.
If you want to explore this area and be at the forefront, you can start using ESG criteria for investment. In this regard, the market offers some options for sustainable and profitable investments on the Brazilian stock exchange (B3), which has indices of companies with higher governance standards. You also have investment funds or Structured Operation Certificates (COEs) with companies that meet sustainable development parameters. Additionally, abroad, there are ETFs that track ESG securities, such as the Dow Jones Sustainability Index.
The Problem of Sustainability Indicators
To give you an idea, in 2018, 85% of companies listed on the S&P 500 in the New York Stock Exchange produced some form of ESG report. This alone shows (whether it’s a trend or not) that more managers are concerned about the subject. However, when it comes to performance reports, it’s almost impossible not to mention indicators. You might be wondering how to determine if a company operates according to ESG principles or not.
Currently, agencies and investment funds play a role in measuring companies’ performance based on ESG criteria and creating rankings to guide investors. But if they are the most interested in receiving investments, how seriously can we take these analyses? I ponder on who evaluates this and what interests are behind it.
Next Steps? Where to?
Google and Impax conducted a survey with over 300 investors with at least R$3.5 million in savings and long-term investments. The main goal was to understand their positions regarding climate change and indirectly the subject of our article related to ESG. Some of the conclusions were:
- 70% expressed concern about climate change.
- 15% took investment measures in renewable energy.
- 33% claimed to have investments focusing on clean energy or sustainability.
I always have reservations about surveys of this kind because the paper accepts any response, and the reality we see from companies is far from being so positive. In any case, I’m pleased when I see indications of some change in this scenario. After all, it’s better to have this progress and concern (regardless of whether the motivation is more financial or not) than to have the disregard of decades ago.
