ESG is an internationally acknowledged framework used by corporations to demonstrate standards and activities they conduct to ensure their overall business model considers Environmental, Social, and Governance factors to be aligned with corporate values.
ESG stands for Environmental, Social, and Governance and forms the main pillars of this framework. ESG is designed around multiple questions into a corporation's management within these areas and how claims can be supported by international regulations and laws under Conventions such as the United Nations (UN), and the International Labor Organization (ILO) in addition to national and federal regulations. To ensure compliance with ESG, a complex score is generated based on how a corporation manages:
- The Environmental dimension of a company's Stewardship is evaluated based on questions about the management of natural resource use, carbon emissions, pollution, and energy efficiency.
- The Social dimension looks into how companies manage suppliers, customers, and community relations. This is especially focused on questions about human rights, diversity, inclusion, and overall well-being in the workplace.
- The Governance dimension measures a company’s accountability towards shareholder rights by evaluating board diversity and independence, in addition to the general corporate transparency.
What is ESG?
ESG has gained popularity in recent years and many corporations now have in-house staff and permanent teams to ensure compliance to these. Yet ESG is simultaneously being criticized for being too shallow and based upon broad and incoherent measurement methods. Most corporations select the ESG factors to include and how to measure these, why ESG can be considered prone to subjectivity and bias in the design process to a point where the framework can be used to misrepresent the company image overly positively into these dimensions. Nonetheless, ESG reporting has gained momentum in the wake of increased interest from ESG impact investors and targeted ESG Funds pushing forward this market and driving companies to implement new processes of (ESG) impact measurement and (ESG) impact reporting in pace with increased consumer demand for more transparency and more responsible production through the value chain.
Data relating to ESG factors provide insight into the environmental, social, and corporate governance performance of a company, which is subsequently used to measure how ethical and sustainable the company is. ESG data is collected by data providers and can be used to assess a company's responsible investment practices.
Why does ESG Data matter?
After the pandemic, companies and corporate boards are under tremendous pressure to be transparent and develop comprehensive corporate social responsibility programs. Environmental and geopolitics problems have become business matters. A company's low ESG scores or ratings when out in the markets affect the financial condition of the company worldwide.
All types of investors can understand the pre-trade ESG risks with the help of ESG data. Thus, investors can make equitable, beneficial, and sustainable investment decisions with the data. External agencies are working on providing transparent ESG data because investors are making sustainable investments.
Investors that are focused on ESG for their investments can gain from it. Companies with teams that can effectively manage their environmental, social, and governance risks and opportunities are helping investors make informed decisions. This is the reason there is an increase in demand for ESG data so that investors can evaluate ESG performance.
What are the sources of ESG data?
ESG data comes from various sources in different forms. There are internal and external data sources. Internal data is provided by the company itself. whereas external sources are from third-party agencies, government agencies, and other media platforms. ESG data is mostly derived from self-reported data, but can also be obtained from third parties and other real-time data from media.
Internal ESG Data Sources:
- Company Website
- Company Annual Report
- Company ESG Report
- Details regarding the quality of working conditions and labor practices
- Corporate leadership data, including executive compensation
External ESG Data Sources:
- External data, such as weather forecasts, traffic reports, etc., in which the source is not physically accessible.
- Social media such as LinkedIn, Twitter, and Facebook
- Analysis of news articles, media releases, and press releases based on natural language processing
- Information on Company review sites
External data is modified more often in some cases in real-time. Internal data is available in 6-12 months because company ESG reporting is done yearly and additional research takes time.
ESG Standards Boards
Many ESG standards boards operate similarly to the Financial Accounting Standards Board. To ensure consistency in reporting ESG impact, they set forth accounting principles and reporting guidelines.
Among the most prominent ESG standards boards are:
Sustainability Accounting Standards Board (SASB)
Carbon Disclosure Project (now referred to only as CDP)
Climate Disclosure Standards Board (CDSB)
Global Reporting Initiative (GRI)
Task Force on Climate-Related Financial Disclosures (TCFD)
International Integrated Reporting Council (IIRC)
CORPORATE ESG AND ESG ANALYTICS
ESG has gained popularity in recent years and many corporations now have in-house staff and permanent teams to ensure compliance is reached through methodic data collection and ESG reporting. Corporate ESG is characterized by having ESG integrated into everyday company activities. A structured implementation and data tracking of how the company reaches goals and objectives will require a designated work area that deals with ESG analytics and ESG data Management.
Here the methodology and data collection approach will be scoped and defined to reflect ESG factors that are relevant to the company’s business areas and should optimally keep a record of related secondary effects that are directly or indirectly connected to the company's activities. Equally, it will require staff that will be in charge of ESG data analytics and correlate an area of ESG data science for data cleaning, processing, and analytics.
The team should conduct any gap analysis to optimize the quality of data collection to update and adjust systems to reflect and capture the intended ESG Social Impact from baseline and throughout the whole measurement period.
ESG factors and how these are met take place in the complex interim of all business activities that touch upon Environmental, Social, or Governance issues. ESG surveys and scores are used to track and monitor their compliance with these. Having proper ESG data analytics and systems in place enables corporates to track and measure direct ESG impact that is generated through concrete activities into:
Importance of ESG
The quality of ESG reporting still varies greatly and there is continuously a need for standardized reporting on sector-specific ESG issues. However, ESG has arisen as an important market component in a world that changes rapidly in pace with new and complex social and environmental challenges. This, combined with an increased stakeholder demand for more accountability from corporates has driven forward the interest to implement common ESG standards while promoting resilient market responses. As part of these developments, more corporates and investors have reckoned the private sector’s role in alleviating urgent global problems such as climate change and social inequality. Equally, ESG as a corporate framework has turned out to be a good business case as implementing ESG concerns and activities can generate financial returns through environmental energy savings or by acquiring new consumer markets.
In addition, a major number of investors and executives consider ESG programs to generate shareholder value and the potential to bring about both short-term and long-term value. This is interesting as the current COVID-19 pandemic has shown that businesses with well-applied ESG practices in place seem to be more resilient in the face of adversity. With that in mind, ESG has gained momentum as an indispensable framework to ensure that Environmental, Social, and Governance factors are given higher priority to reach Corporate Impact.
Equally, each year more and more companies are joining in to align forces upholding similar minimum standards to ensure a collective transition towards more responsible business practices sector-wide. Whereas traditional Corporate ESG investing uses the framework as a supplement to traditional financing, Social Responsible Investing (SRI) makes use of ESG analytics as a supplement to Due Diligence processes. Perhaps the major contribution of implementing Corporate ESG is how this framework helps push the general industry to reconsider ethical business practices and re-establish sector-wide adopted notions about corporate responsibility by implementing minimum investment thresholds to screen out harmful businesses such as:
- Alcohol, tobacco, and other addictive substances
- Production of weapons and defense tools
- Terrorism affiliations
- Human rights and labor violations
- Environmental damage
While ESG holds great potential to reform many industries for the better, ESG impact reporting still faces criticism of being shallow and can be considered a weak point that can be exploited for greenwashing. This concern is mainly based upon the fact that even though ESG as a framework takes into consideration international standards and universal labor and human rights, most corporations still define what ESG data they will include in their measurement and what to exclude. As a framework, if not coherently designed and executed, ESG is at risk of becoming a broad and incoherent measurement tool that in this manner, can be prone to subjectivity and bias in the design process to a point where the framework can be used to misrepresent the company image overly positive into these dimensions.
ESG Social Impact
The ESG framework marks itself by providing a complete guide that takes into account all possible factors and digs into each category to clarify the level of attention that must be practiced if a company wants to be serious about its Environmental, Social, and Governmental responsibility. Furthermore, implementing ESG marks a shift where initiatives related to these should be connected to internationally recognized conventions and universal human rights, and concerns about these should be specified within all levels of the organization. The issue of social inclusion has been brought to the forefront as an indispensable part of the corporate realm, and by having proper ESG data management and ESG software designed around the importance of measuring inclusion, companies can identify areas that might be unequally distributed within the company.
This level of social data is measured frequently and by applying an ESG Social Impact lens, the systems in place will immediately capture undesirable distribution within these parameters. Measuring and collecting social data helps visualize potential issues and can be considered a first step in the right direction to make the workplace more inclusive, ethical, and socially responsible. Reclaiming the Social aspect of ESG is essential to ensure that the intended positive impact benefits people. Concerns about the Social aspect of ESG should equally include solutions that are socially and culturally adopted and designed around people's needs in a way that can contribute to a positive impact on people’s everyday lives.
Socially aware investments
In the last couple of years, there has been an increased interest from investors to place their money in projects that reflect their values while generating revenue, this has led to a variety of new types of social investments within the ESG realm including:
- ESG investing,
- Social Responsible Investing (SRI)
- Impact Investing
While all the investment tools are designed to accelerate and impulse sectors and companies that have social and environmental impact high on the agenda, the concepts tend to be used contextually as if these were equal in approach, requirements, and impact potential. Nonetheless, there are some significant differences between these social investment approaches that are important to understand as these might influence how to organize the client portfolio to align these with intended impact goals.
Specifically refers to types of investment that are intended to improve aspects related to Environmental, Social, and Governance factors, in addition to more traditional financial factors. ESG investing is driven by a strong business case that can still ensure revenue. Understanding ESG impact data gives investors a more holistic view to consider factors to mitigate risks as well as to identify opportunities. Typically investors will have a scorecard based upon a corporate ESG assessment to calculate an enterprise’s ESG score. It must be stressed that ESG investing is principally driven by the notion of generating revenue for shareholders, yet understanding an enterprise’s overall ESG score is essential to direct investments to reflect an increasing demand for more social consciousness in these realms.
Social Responsible Investing (SRI)
Social Responsible Investing (SRI) is characterized by investments based upon a set of ethical guidelines in addition to social and environmental targets. Equally, SRI tends to have an exclusion list of types of companies and sectors that cannot be included as these conflict with the overall values. Specifically, the ESG standards within SRI are used as a binary screening to identify and detect positive and negative factors when conducting initial due diligence.
Impact Investing is designed to impulse social businesses or organizations to complete or develop programs co-designed around certain impact goals to generate a positive change in society. This type of investing is mainly driven by the intended positive impact that can come from such investments. Impact Investing focuses more on how to ensure a positive impact on social or environmental factors than on financial revenue. These types of investments are often riskier compared to Corporate ESG investments that give preference to projects that foremost document strong financial viability, whereas Impact Investing is more concerned about impulsing positive long-term impact. To ensure such, Impact Investing holds a closer relationship with stakeholders and develops more collaborative processes to ensure the financial viability is co-created with the project owner in the long run. The alignment of ethical business values is considered the highest priority.
ESG vs CSR
ESG is defined by its compromise to uphold internationally acknowledged standards and a strong business case for implementing these. In contrast, CSR is driven forward by consumer demands and a transition in company culture. A tendency that has roots in a broader social sustainability movement that has gained momentum and is today considered part of the best practice approach in most businesses. ESG seems more quantitative in its approach and is driven forward by the notion that Corporate ESG today is an almost indispensable approach to ensure business resilience and sustainability, to ensure more stability while attracting like-minded investors. Applying ESG can also visualize how to distribute and allocate resources in-house, which is more financially sustainable and leads to overall savings. Thus implementing ESG Impact Management can strengthen a company's competitive advantages and ensure future market resilience, all while generating revenue.
ESG is more quantitative in its approach and is driven forward by a strong business case founded in the notion that Corporate ESG today is an almost indispensable approach to ensure business resilience and sustainability. This approach ensures more stability while attracting investors with shared values. Applying ESG can also visualize how to distribute and allocate resources in-house, which is more financially sustainable and leads to overall savings. Thus implementing an ESG structure can strengthen a company's competitive advantages, ensure future market resilience, and generate revenue.
Corporate Social Responsibility (CSR) should be tailored to align with a company's core business activities and integrated into all aspects of impact management. Companies that practice CSR should view it as a fundamental component of their overall mission to evaluate the impact of their corporate values and supply chains holistically. This evaluation should encompass factors such as biodiversity, human rights, business ethics, environment, and human capital.
CSR strategies are far-ranged and are highly shaped by the corporation's main business concerns and its overall mission, some common examples of CSR initiatives include:
Reduction of a negative footprint on the environment
Diversity and inclusion programs
Socially-focused branding activities
Improved labor practices and production modes throughout the whole supply chain
A common pitfall for CSR can be found in how there needs to be more concern for the social adoption of otherwise well-intended initiatives. Often CSR initiatives are designed and planned far away from the context and reality sought to be improved. Only some final stakeholders are included in this process. This increases the risk that CSR initiatives might fail to achieve the intended impact. CSR must also adapt to new social movements and be aligned with the typical consumer's expectations.
In recent years more attention has been brought to issues of social injustice, especially regarding racial, gender, and minorities that are structurally marginalized, and visualizing these issues should make industries implement more mechanisms to re-consider social justice within the company and its extended value chain. With increased consumer demand for corporations to be more accountable, consumers increasingly require a minimum threshold for social justice that should include concerns to:
Economic justice: Poverty eradication, income equality, equal opportunity employment, etc.
Social justice: Voting rights, racial injustice, climate change, LGBTQ+ rights.
In pace with social demands and new movements, CSR has transitioned from solely focusing on bringing something back to the community to transforming at the community level. Giving something back through one-way and sporadic donations is not enough, as this rarely generates sustainable results once a CSR initiative is ended. This is especially the case as many issues of greenwashing and inadequate social solutions occur when CSR is designed upon a solely philanthropic principle. Instead, CSR should be planned and designed in a way that transforms society, co-creating solutions for change together with final stakeholders while representing the broader company culture.
ESG and CSR, despite being based upon acknowledged frameworks, still have some way to go, as there remains a big gap in interpretation as to how these should be applied in dynamic and social settings. Moreover, no international organization can hold companies accountable for an incomplete or inadequate application of ESG and CSR principles. In this manner, these approaches can quickly turn into somewhat hollow declaration statements intending to make a positive change and reduce harm without generating measurable impact results.
Social Business Practices and Social Value
Most companies will document and present ESG social impact based on results that refer to factors directly related to human conditions and social aspects. Often this will be presented in numbers that leave a flat description of the social results reached and not describe what is changing for the better and for whom it's changing. There is however a strong business case to be gained from understanding the Social Impact from the corporate perspective considering the continuously growing consumer demand for more ethical and socially responsible products and services as this can generate Social Value.
Social Value refers to the non-monetary return that comes from a social business approach, and how this is experienced by people and key stakeholders. Social value is difficult to measure and quantify but it is within this realm that real and meaningful impact is most often ensured through improving quality of life, generating inclusion, and creating a positive impact for main stakeholders. To be a measurable social business, certain concerns must be made to ensure coherent business practice by prioritizing a stakeholder-centered business model that guarantees human conditions and social well-being into account. It is equally important that the social business extend its Due Diligence to the whole supply chain and deal only with fair and decent production to ensure labor rights are respected throughout the whole chain.
Focusing on stakeholder's impact
From a corporate point of view focusing on the stakeholder’s impact serves to identify companies’ main markets and demands while ensuring the enterprise is making its goals. To understand the social value that could be generated, stakeholders need to be included in the equation. After all, these are in an important position to give insights into the lived experience, contextualizing and elaborating how exactly something is changing for the better in their real-life settings.
Applying a stakeholder-centric focus and including these deliberately in evaluation processes is ultimately the most direct way for a company to know if it's succeeding in generating any stakeholder impact. Focusing on the stakeholders could also unveil areas that should be strengthened or risks to look out for from the business point of view. Including stakeholders directly in the evaluation process helps to ensure that overall impact activities remain relevant and aligned with the target group's needs and the overall business proposition.
By understanding the consumer and end-user the corporation can narrow down its scope and have a more clear brand image that represents its main market and communicates how they are positively impacting aspects that are important to stakeholders. This creates consumer loyalty while giving the corporation a competitive advantage that goes beyond pure pricing.
Stakeholder Impact Analysis
There is a clear distinction between reporting output as opposed to impact outcomes. Whereas the first refers to the immediate results from program activities, the latter focuses on the sustainability and real-life impact on the final stakeholders. Including stakeholders early and directly in impact, studies are crucial to understand if certain results contribute to a positive difference. The first step to conducting a Stakeholder Impact Analysis includes identifying the target group and assessing their needs, this usually entails gathering demographic data and identifying key actors that can help shed light on essential information. To understand the stakeholder-centric information in a broader context it is advised to use a diversified data collection from sources related to the ecosystem surrounding the stakeholders.
This is especially important considering that many well-meaning programs could otherwise turn out to simply be expensive investments without any social return. After all, if stakeholders find no value or little necessity from social corporate initiatives it will have a neutral or even negative impact. By implementing concerns to the stakeholders early on in the evaluation process there are associated benefits to gain from listening to testimonies from users to continuously understand successful areas and potential inadequate or not accounted for results while a project is still on a baseline level. Many well-intended programs must also consider cultural adoption.
Sometimes a project works optimally in one context, but moving the same concept to a different continent or a different cultural context might be received differently. Having qualitative data collection processes in place directly with stakeholders is crucial to understanding the immediate reception of a program initiative, its functionality, and its social and cultural adoption.
Corporate Procurement is broadly defined as the discipline of acquiring and sourcing goods to obtain a competitive financial advantage upon distribution and as such has been a weak linkage in the value chain prone to human rights violations and negative environmental impact.
Social value on the other hand represents the non-monetary return for humans and can be measured in the improvement of quality of life or other qualitative indicators that positively affect human conditions and the surrounding environment.
Moving beyond Corporate Procurement can even give companies a competitive business advantage, whenever this is adapted in a way that reflects the company’s core business. There is a constant and increasing interest in ethically and socially responsible business from consumers. More countries are also adopting regulations that require companies to take a larger responsibility throughout their supply chain. Corporates that focus upon the Social Procurement can gain advantages by:
- Increasing corporate brand equity and brand differentiation
- Triggers corporate transformation
- Improves employee engagement
Social procurement is about embedding social impact into core business practices for Corporations. This is a paradigm shift from a traditionally purely monetary focus upon generating a financially viable business model to instead consider the triple bottom line model that includes revenue to be measured from its direct Social, Environmental, and Financial impact. Social Procurement is a Corporate development based upon two key components that merge traditional Corporate Procurement with Social Value.
ESG Impact Management and ESG Impact Measurement
ESG Impact reporting has gained momentum in the wake of increased interest from ESG impact investors and targeted ESG Impact Funds pushing forward this market and driving companies to implement new processes of ESG impact measurement and ESG impact reporting in pace with increased consumer demand for more transparency and more responsible production. More ESG investments have led to the need to implement areas of ESG Impact management and have a proper impact portfolio in place. Corporates can build capacities of portfolios to help them show impact through different impact measurement methods. Generally, this includes the measurement of quantitative and qualitative indicators of the intended positive or negative impact of projects, grants, or investments. This will typically be designed around three main areas consisting of:
- Impact Framework
- Assessment Results
- Performance Evaluation
Selecting a relevant ESG Impact Measurement and impact framework should be defined on the project scope, sector, and intended impact. Including concerns in ESG in the impact, portfolio helps corporations to be prepared for future social and environmental challenges. Including private sector actors in this transition is key. The Interamerican Development Bank has together with investors and other development finance organizations researched how investing time and resources into impact measurement and management is essential. Their findings show how measuring and researching impact can lead to actionable solutions and knowledge that can be applied to targeted impact investments in emerging markets to align efforts to reach common impact goals.
Balancing the fine line of generating impact while ensuring financial sustainability is possible as long as corporations apply a systematic impact portfolio approach that integrates both impact and financial management. Applying ESG principles can make a difference in the operationality of the management and measurement of impact when these principles go beyond simply screening and instead are used as a practical framework to pursue measurable Social, Environmental, and Governmental impact, positively benefiting the stakeholders while creating corporate financial sustainability.
Social procurement is about embedding social impact into core business practices for Corporations. This is a paradigm shift from a traditionally purely monetary focus upon generating a financially viable business model to consider instead the triple bottom line model that includes revenue to be measured from its direct Social, Environmental, and Financial impact. Social Procurement is a Corporate development based upon two key components that merge traditional Corporate Procurement with Social Value.
Learn More: Social Impact definition