What is ESG?

environmental criteria

ESG criteria, also known as environmental, social and governance criteria, are a set of factors used to assess the performance of a company or entity in terms of sustainability and corporate responsibility. These criteria are used by investors, analysts and other interested parties to assess a company's impact on the environment, society and its governance structure. Many people don't know what is ESG.

For this reason, we are going to dedicate this article to telling you what ESG is, its characteristics and importance.

What is ESG?

planet care

The acronym ESG stands for the three words Environmental, Social and Governance in English and actually refers to the factors that make a company sustainable through its social, environmental and good governance commitments, without neglecting financial aspects.

The origins of the initials date back to the early 2000s as a result of the evolution of Socially Responsible Investing (ISR). But it goes beyond SRI as we know it, because it takes a holistic approach to all processes in a company, allowing us to see the sphere of impact beyond the business.

Successfully identifying, managing and measuring ESG criteria within a company has had a direct impact on its ability to secure investments, its reputation and the sustainability of its business.

Meaning of ESG broken down

what is ESG in companies

The first criterion, environmental, focuses on evaluating how a company addresses and manages environmental challenges. This includes things like energy efficiency, waste management, greenhouse gas emissions, conservation of natural resources and the use of renewable energy. Companies that adopt responsible environmental practices tend to be better valued in this criterion.

The second criterion, the social one, refers to how a company manages its relationships with employees, customers, suppliers, local communities and other social actors. This includes aspects such as fair labor practices, diversity and inclusion, occupational health and safety, community relations, and positive social impact. The companies that promote equity, diversity and social well-being are often considered more favorable from this point of view.

The third criterion, that of governance, evaluates the structure and governance mechanisms of a company. This includes aspects such as the composition of the board of directors, transparency in the disclosure of information, risk management and internal control mechanisms. Companies with strong governance, where accountability is encouraged and conflicts of interest are avoided, are often perceived as more trustworthy and stable.

ESG criteria They are considered important because they offer a more comprehensive and long-term view of a company's performance. By taking into account environmental, social and governance factors, investors and analysts can better assess the risks and opportunities associated with a company. In addition, more and more investors are looking to align their investments with sustainable values ​​and look for companies that are socially and environmentally responsible.

What are not ESG

what is ESG

Given the increasing focus on ESG criteria in the corporate world, it is important to understand which strategies fall within its purview and have a real social impact.

The basis for determining whether a strategy meets ESG criteria are the Sustainable Development Goals (SDGs), established by the United Nations in 2015. This is a comprehensive framework to promote sustainable planning.

However, ESG parameters are not:

  • Activities generally framed solely by values. Investors and managers shied away from making sweeping statements. These actions must be supported by concrete metrics to show the creation of differentiated value and provide useful information.
  • Terminology related to existing processes. It is not about changing the name of what we are already doing, ESG parameters have to combine novelty and business models.
  • Annexes in the income statement. The approach must be integrated and impact the business horizontally.

Importance for the environment and humans

The importance of ESG criteria lies in the fact that we are facing increasingly pressing global challenges, such as climate change, social inequality and a lack of transparency in business practices. These challenges they not only affect the environment in which we live, but also have a direct impact on the profitability and reputation of companies.

By considering environmental, social and governance aspects, ESG criteria provide a more complete picture of how a company is managing these challenges and whether it is prepared to face them. Companies that adopt sustainable policies and practices they are not only contributing to the preservation of the environment, but they are also creating long-term value for their shareholders and for society in general.

Investors are increasingly interested in investing in companies that are socially and environmentally responsible, as this not only reduces the risks associated with possible negative impacts, such as regulatory fines or legal claims, but can also generate business opportunities and improve the company reputation.

In addition, ESG criteria can help prevent crisis situations and better manage risks. For example, a company that does not properly manage its carbon emissions may face higher regulatory costs in the future or restrictions on its operations. In the same way, a company with poor governance management may be vulnerable to financial scandals that damage its image and its relationship with investors.

On the other hand, ESG criteria can also encourage innovation and efficiency within companies. By adopting sustainable practices, companies can discover new ways to reduce costs, improve energy efficiency, optimize the use of resources, and strengthen their competitive position in the marketplace.

As you can see, these criteria are important because they allow us to assess how a company is addressing environmental, social and governance challenges. By investing in companies that care about sustainability and corporate responsibility, we can contribute to the development of a more equitable, sustainable and resilient world.

I hope that with this information you can learn more about what ESG is, its characteristics and importance.

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