ESG expert from Cyprus member firm Kreston Ioannou & Theodoulou
Christina is a consultant and certified project manager, specialising in ESG, sustainability and climate change, with 13+ years of expertise. Christina has successfully supported multiple organisations across the public and private sectors, covering a range of industries (e.g. HORECA, food & beverage, energy, telecommunications, waste, banking, transportation and construction), to operate and grow sustainably and resource efficiently.
What is ESG?
May 26, 2022
ESG, or environmental, social, governance, a prominent buzz word in the business world recently, refers to the criteria for measuring the sustainability impacts of a company. Neither ESG nor sustainability, however, are new terms or concepts. In fact, sustainability, which refers to the ability of an organisation to balance its short- and long-term needs, so that short-term success for an organisation does not risk its long-term survival, was first defined by the Brundtland report “Our Common Future” back in 1987.
To help distinguish the two terms, if sustainability is the framework to make an organisation responsible on a number of areas, then ESG criteria make the efforts of an organisation pertaining to sustainability measurable and quantifiable.
Why is ESG important?
ESG has gathered considerable attention in recent years largely due to three main factors.
- ESG criteria incorporated into evaluations have proven to help improve risk management and lead to comparable, if not higher returns over the long-term, compared to traditional financial investments. For example, according to Forbes Advisor, JUST Capital’s JUST U.S. Large Cap Diversified Index (JULCD), an index that tracks the performance of large, public companies with high ESG scores, outperformed the Russell 1000 index for three years in a row.
- There is growing attention and desire by the five main groups of stakeholders (i.e. workers, communities, customers, shareholders and the environment) for organisations to manage their ESG impacts, known as the social license to operate. Companies are expected, amongst many other issues, to:
- address their climate change risks;
- utilize renewable energy sources;
- minimize their carbon footprint;
- divest from fossil fuel investments;
- adopt standards of responsible business conduct internally and externally;
- address corruption and money-laundering;
- display LGBTQ+ equality and racial diversity in the workplace and on boards; and
- implement transparent and accountable governance structures.
These actions translate into investor and consumer choices that impact the organisation’s financial performance. Mike Walters, CEO of USA Financial, says that “companies that consider the needs of and impacts on each of their five stakeholder groups, become well-run companies, and well-run companies become good stocks to own”.
- Organisations have been facing growing regulatory pressure to take action and report on ESG. The list of applicable legislation at the EU and national level is dynamic and ever growing, but currently the most prominent pieces of EU legislation in this remit are:
- the EU’s Non-Financial Reporting Directive or NFRD (Directive 2014/95/EU) which is currently being revised to the EU’s Corporate Sustainability Reporting Directive (CSRD), to expand its scope and requirements;
- the EU Taxonomy Regulation (2020/852), which establishes a list of environmentally sustainable economic activities to create security for investors, protect private investors from greenwashing, help companies to become more climate-friendly, mitigate market fragmentation and help shift investments where they are most needed; and
- the Regulation on Sustainability-related Disclosures in the Financial Services Sector (2019/2088), which specifies the exact content, methodology and presentation of the information to be disclosed, thereby improving its quality and comparability and avoiding greenwashing.
The regulatory environment is complemented by a long list of voluntary standards and frameworks for reporting on sustainability and ESG. Some of the most widely adopted by companies globally are:
- the Global Reporting Initiative (GRI);
- the UN Sustainable Development Goals (SDGs);
- the Science-based targets (SBTi’s);
- the Task Force on Climate-Related Financial Disclosures (TCFD);
- the Sustainability Accounting Standards Board (SASB);
- the Carbon Disclosure Project (CDP) questionnaires; and
- the ISO 26000 standard on Social Responsibility.
Why ESG is here to stay
As markets emerge from the COVID-19 pandemic, the importance of an organisation’s ESG performance has only been reinforced, according to the World Economic Forum. Organisations have been forced to focus on long-term sustainability over short-term profits, and those that embed ESG metrics into their core business strategies now, will build long-term sustainable value. BlackRock, the largest investment company in the world, has built the industry’s largest suite of ESG exchange traded funds to enable more individuals to invest sustainably. Their CEO in his 2022 letter noted that: “We focus on sustainability not because we are environmentalists, but because we are capitalists and fiduciaries to our clients. …Every company and every industry will be transformed by the transition to a net-zero world. The question is, will you lead, or will you be led?”
It is clear that companies need to increase their focus on ESG issues. Any company risks having its image tainted and stock value decline otherwise. Take for example Tesla, which made headlines recently for being removed from the S&P 500 ESG index, due to a poor score. To ensure companies operate and grow sustainably, they need more support to improve their knowledge and skills on ESG issues, so that they can better manage their impacts, better communicate their actions and better perform on market indexes.
Kreston firms can help support your company in its ESG journey. Please search for your nearest Kreston Global office here and they can help signpost you to the countries you need support in.