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ESG stands for Environmental, Social, and Governance, and it refers to the three most important variables to consider when assessing the long-term viability and ethical effect of a business or enterprise. ESG criteria are used by the majority of socially conscious investors to screen assets. It's a general phrase used in capital markets, and it's often utilised by investors to assess company behaviour and forecast future financial performance.
Environmental, Social, and Governance (ESG) elements are a subset of non-financial performance metrics that cover ethical, sustainable, and corporate governance matters such as ensuring accountability and controlling the corporation's carbon impact.
There are three main components to ESG—environmental, social, and governance. Below is a summary of each:
Environmental criteria include a company’s use of renewable energy sources, its waste management program, how it handles potential problems of air or water pollution arising from its operations, deforestation issues (if applicable), and its attitude and actions around climate change issues.
Other possible environmental issues include raw material sourcing (e.g., does the company use fair trade suppliers and organic ingredients?) and whether a company follows biodiversity practices on land it owns or controls.
Social criteria cover a vast range of potential issues. There are many separate social aspects of ESG, but all of them are essentially about social relationships. One of the key relationships for a company, from the point of view of many socially responsible investors, is its relationship with its employees.
Governance, in the context of ESG, is essentially about how a company is managed by those in the top floor executive offices. How well do executive management and the board of directors attend to the interests of the company’s various stakeholders – employees, suppliers, shareholders, and customers? Does the company give back to the community where it is located?
ESG reporting is increasingly becoming recognised as an important topic for a plethora of organisations. It's essential to understand that what is expected from businesses has dramatically changed - especially in the past year.
Investors, consumers and stakeholders are more focused on how their investments impact social and environmental issues since they need to feel certain that their financial contributions are actively supporting and expressing their values.
Meanwhile, we see more regulatory forces coming forward and applying new requirements to companies regarding their ESG reporting, pushing them to integrate these aspects into their strategy.
Also, one of the most important aspects of ESG was highlighted this past year from the COVID-19 pandemic. We noticed an increase in the importance of emphasising employee development and training, compensation, benefits, health and safety, supply chain resilience, diversity, and corporate culture.
Businesses with more genuine environmental, social, and governance (ESG) profiles have, and will continue to exceed their peers. Corporations need to build a sincere connection with stakeholders, so they can be able to recognise and react to the transformations occurring in the world.
Our world is under pressure, and we are still facing a challenge ahead of us. The importance of sustainability and climate change should be universally recognised. Environmental and social issues should not be separated when planning strategies and proactive steps towards a net-zero economy need to be made.
The new Regulatory Technical Standards (RTS) that define the shape of the ‘level 2’ ESG disclosures required under the new Sustainable Finance Disclosure Regulation (SFDR), valid from 2022, present a major opportunity for private equity managers to enhance and standardise ESG data collection, allowing for greater benchmarking opportunities and enabling clearer communication to investors and other stakeholders. With this opportunity, however, comes the challenge of collecting and managing standardised data from a diverse range of portfolio companies.
Whilst PE firms are particularly adept at engaging with their portfolio companies, headaches may arise from data quality issues, as well as inconsistencies in data collection approaches between companies. For instance, in requiring a full breakdown of all greenhouse gas (GHG) emissions, including scope 3 from 2023, the requirements may prove particularly difficult for smaller companies with less mature environmental data collection and reporting.
Across the asset-management world, interest in Environmental, Social, and Governance (ESG) performance has soared since the launch of the UNPRI (Principles for Responsible Investments) in 2006. Integrating ESG factors into investment decisions and portfolio management strategies is increasingly becoming the norm and investors are seeking to better understand a company’s long-term value by looking at ESG information.
However, this trend in responsible investment and ESG reporting is presenting investors with many challenges when it comes to gathering, maintaining and analysing ESG data. Gaining access to accurate, credible and consistent ESG data and supporting information is difficult.
Software is the obvious way to streamline the ESG data collection, questionnaire distribution and management process. Investors are now looking for purpose-built ESG software platforms to collect, track and analyse data and material ESG KPIs from their portfolios on an ongoing basis.
Learn more about why investors are seeking ESG software to manage portfolio data.
ESG reporting for private capital investors is complicated by both the lack of regulation and the lack of clean and effective gathering, maintenance and analysis of ESG data. In public markets, there are multiple providers of ESG data but very little correlation, and the tendency to scrape data has its own problems.
Greenstone’s investor ESG software - InvestorPortal - enables General Partners to collect accurate, transparent ESG data for their prospective, current and past portfolio companies, and also to share company, fund and portfolio level analysis and reports with their own investors.
Using this intuitive solution, managers can centrally coordinate the data collection process by distributing SFDR-aligned questionnaires to portfolio companies, monitoring engagement, and receiving portfolio-aggregated statistics. Detailed reporting guidance helps to ensure consistency and a robust approvals process ensures high data quality. For smaller PCs with less mature environmental reporting, the new ‘GHG emissions wizard’ allows PCs to calculate their scope 1, 2 and 3 emissions in a user-friendly manner, powered by our library of >1 million emissions factors.
Talk to Greenstone today to find out more.