ESG KEY ISSUES

ESG – KEY LEARNING MATTERS

INTRODUCTION

The concept of Environmental, Social, and Governance (ESG) has gained significant momentum over the past few years. ESG refers to the three pillars of sustainable investing that consider not only the financial performance of a company but also its impact on the environment, society, and governance structure. The purpose of this paper is to provide an in-depth analysis of ESG and its significance in the investment decision-making process.

ESG FACTORS

ENVIRONMENTAL FACTORS:

 The environmental pillar of ESG considers the impact of a company's operations on the environment. It includes factors such as carbon emissions, waste management, water usage, and biodiversity. Environmental risks, such as climate change, can have a significant impact on a company's financial performance. Therefore, investors are increasingly considering environmental factors in their investment decisions.

SOCIAL FACTORS:

The social pillar of ESG considers a company's impact on society. It includes factors such as labor standards, human rights, community relations, and diversity and inclusion. Companies that demonstrate a commitment to social responsibility are more likely to attract and retain top talent and have better customer and stakeholder relations.

GOVERNANCE FACTORS:

The governance pillar of ESG considers a company's internal controls, board composition, executive compensation, and shareholder rights. Good corporate governance ensures that a company operates in a transparent and accountable manner. Companies with strong governance structures are less likely to engage in fraudulent activities and are better equipped to manage risks.

ESG INTEGRATION

ESG integration is the process of incorporating ESG factors into the investment decision-making process. There are various approaches to ESG integration, including exclusionary screening, positive screening, and ESG integration. Exclusionary screening involves excluding companies or sectors that do not meet certain ESG criteria. Positive screening involves investing in companies that demonstrate a commitment to ESG factors. ESG integration involves analyzing ESG factors as part of the investment decision-making process.

ESG PERFORMANCE

Numerous studies have shown that companies that demonstrate a commitment to ESG factors tend to outperform their peers over the long term. Companies that prioritize ESG factors are more likely to have lower volatility, higher return on equity, and higher credit ratings. In addition, companies that prioritize ESG factors are more likely to attract long-term investors who are looking for sustainable investments.

ESG INVESTING

ESG investing refers to the process of investing in companies that demonstrate a commitment to ESG factors. ESG investing is a growing trend, and there are various investment vehicles available to investors, including mutual funds, exchange-traded funds (ETFs), and separately managed accounts (SMAs). In addition, ESG investing is no longer limited to equities; there are now ESG-focused fixed-income funds and alternative investment vehicles.

ESG CHALLENGES

ESG investing is not without its challenges. One of the challenges is the lack of standardized ESG metrics. ESG metrics vary across industries and countries, making it difficult for investors to compare companies on an apples-to-apples basis. In addition, some companies engage in "greenwashing," where they exaggerate their ESG credentials. This makes it difficult for investors to identify truly sustainable investments.

CONCLUSION

ESG investing is a growing trend that reflects the increasing importance of sustainability in the investment decision-making process. Companies that prioritize ESG factors tend to outperform their peers over the long term, and ESG investing is no longer limited to equities. However, ESG investing is not without its challenges, including the lack of standardized ESG metrics and the prevalence of greenwashing. Therefore, investors need to conduct thorough due diligence when considering ESG investments.

NEW FRAUD RISKS - ESG ENVIRONMENT

Environmental, social, and governance (ESG) issues have become increasingly important for businesses in recent years, as investors and other stakeholders are paying more attention to these factors. However, the evolving ESG environment also presents new fraud risks that companies need to be aware of.

GREENWASHING:

Greenwashing occurs when companies make false or misleading claims about their environmental credentials to appear more sustainable. This can include exaggerating the environmental benefits of products or services or failing to disclose valuable information about their environmental impact. This can mislead investors and other stakeholders, leading to reputational damage and financial losses.

MISLEADING SOCIAL IMPACT CLAIMS:

Companies may also make false or exaggerated claims about their social impact, such as claiming to support local communities or reduce inequality. This can be done by misrepresenting the extent of their social programs, or through selective reporting of their activities.

Inadequate reporting: As ESG reporting standards continue to evolve, companies may struggle to keep up with the requirements and may fail to provide accurate and complete information. This can lead to misrepresentations or omissions that could mislead stakeholders.

FAILURE TO DISCLOSE ESG RISKS:

Companies may also fail to disclose material ESG risks, such as environmental liabilities or social conflicts, which could have a significant impact on their business. This can mislead investors and other stakeholders, leading to reputational damage and financial losses.

LACK OF INTERNAL CONTROLS:

Companies may also lack adequate internal controls to monitor and manage their ESG risks, which can create opportunities for fraud and other misconduct.

To mitigate these fraud risks, companies should establish robust ESG policies and procedures, including strong internal controls and effective reporting mechanisms. They should also ensure that they have a strong corporate culture that promotes ethical behavior and transparency and that they are regularly monitoring and assessing their ESG risks. In addition, companies should consider engaging with external stakeholders, such as investors and NGOs, to understand their expectations and concerns around ESG issues.

ESG CONCEPTS WITH EXAMPLES - 1

ESG (Environmental, Social, and Governance) concepts with 2 examples of each:

CLIMATE CHANGE: The long-term alteration of global weather patterns caused by human activity, primarily the burning of fossil fuels.

?   Example 1: Carbon emissions from burning fossil fuels for electricity generation and transportation.

?   Example 2: Increased frequency and severity of natural disasters, such as hurricanes and wildfires, due to climate change.

RENEWABLE ENERGY: Energy generated from natural resources that can be replenished, such as wind, solar, hydro, and geothermal power.

?   Example 1: Solar panel installations on residential and commercial buildings to generate electricity. `

?   Example 2: Wind turbines on land and offshore to generate electricity from wind power.

CARBON FOOTPRINT: The total amount of greenhouse gases (primarily carbon dioxide) emitted by an individual, organization, or product over a specific period.

?  Example 1: A company's carbon footprint from its manufacturing processes and supply chain.

?  Example 2: An individual's carbon footprint from their transportation, energy use, and consumption habits.

SUSTAINABLE DEVELOPMENT: Meeting the needs of the present without compromising the ability of future generations to meet their own needs.

?   Example 1: Developing affordable and energy-efficient housing in urban areas to reduce greenhouse gas emissions.

?   Example 2: Promoting sustainable tourism that supports local communities and protects natural resources.

WATER MANAGEMENT: The responsible use, treatment, and conservation of water resources, including reducing water waste and pollution.

?     Example 1: Implementing water conservation measures in agriculture to reduce water use and runoff.

?     Example 2: Investing in infrastructure to improve access to clean water and sanitation in underserved communities.

             BIODIVERSITY: The variety of life in a particular ecosystem or on the planet, including the diversity of species, genetic diversity, and ecosystem diversity.

?     Example 1: Protecting endangered species through habitat conservation and restoration efforts.

?     Example 2: Incorporating native plants and trees in landscaping and construction projects to support local biodiversity.

             HUMAN RIGHTS: The basic rights and freedoms that belong to all people, such as the right to life, liberty, and equality before the law.

?   Example 1: Ensuring fair and safe working conditions for employees, including freedom from discrimination and harassment.

?   Example 2: Advocating for the rights of marginalized and vulnerable communities, such as refugees and Indigenous peoples.

             LABOR RIGHTS: The rights of workers to fair and safe working conditions, fair wages, and protection from discrimination and exploitation.

?   Example 1: Ensuring fair wages and benefits for workers and promoting workplace safety and health.

?   Example 2: Prohibiting forced labor and child labor in supply chains and working to eliminate modern-day slavery.

             SUPPLY CHAIN MANAGEMENT: The process of managing the flow of goods and services from suppliers to customers, including ensuring ethical and sustainable sourcing.

?   Example 1: Tracing the origin of raw materials and ensuring ethical and sustainable sourcing practices.

?   Example 2: Implementing responsible disposal practices for hazardous waste and electronic waste in the supply chain.

             CORPORATE GOVERNANCE: The system of rules, practices, and processes by which a company is directed and controlled, including the roles and responsibilities of its board of directors and management.

?     Example 1: Ensuring board independence and diversity and aligning executive compensation with long-term performance.

?     Example 2: Establishing transparent and accountable decision-making processes and internal controls.

             BOARD DIVERSITY: The inclusion of individuals from diverse backgrounds and experiences on a company's board of directors, to ensure diverse perspectives and better decision-making.

?     Example 1: Appointing women and minority directors to boards of companies in traditionally male-dominated industries.

?     Example 2: Recruiting directors with diverse backgrounds and expertise to ensure diverse perspectives and decision-making.

           EXECUTIVE COMPENSATION: The pay and benefits received by senior executives of a company, including stock options and bonuses.

?     Example 1: Implementing pay-for-performance models that link executive compensation to the achievement of ESG goals.

?     Example 2: Restructuring executive pay to emphasize long-term value creation and reduce short-term incentives.

           SHAREHOLDER ACTIVISM: The use of shareholder voting rights and other methods to influence a company's actions on environmental, social, and governance issues.

?     Example 1: Engaging with companies on ESG issues through shareholder proposals and proxy voting.

?     Example 2: Divesting from companies that do not meet ESG criteria and investing in companies that demonstrate strong ESG performance.

           STAKEHOLDER ENGAGEMENT: The process of identifying and engaging with all parties who have an interest or stake in a company's operations, including customers, employees, communities, and shareholders.

?     Example 1: Assessing the impact of climate change on a company's operations and supply chain and developing a climate risk management strategy.

?     Example 2: Evaluating the social and reputational risks associated with labor and human rights violations in the supply chain

           Materiality: The significance or relevance of an environmental, social, or governance issue to a company's business operations, financial performance, and stakeholders.

?     Example 1: Assessing the impact of climate change on a company's operations and supply chain and developing a climate risk management strategy.

?     Example 2: Evaluating the social and reputational risks associated with labor and human rights violations in the supply chain

           IMPACT INVESTING: Investing in companies and projects that generate positive social and environmental outcomes, as well as financial returns.

?     Example 1: Ensuring employee health and safety by providing protective gear and training to prevent workplace accidents.

?     Example 2: Reducing exposure to toxic chemicals and pollutants in manufacturing processes to protect worker health.

             COMMUNITY DEVELOPMENT: Efforts to support and improve the well-being of communities, including through job creation, education, and healthcare.

?     Example 1: Supporting local community development through philanthropic initiatives and employee volunteerism.

?     Example 2: Conducting environmental impact assessments and engaging with local communities to address concerns and minimize negative impacts.

             SUSTAINABLE AGRICULTURE: Agricultural practices that promote soil health, biodiversity, and the responsible use of natural resources, while also providing food security and economic benefits.

?   Example 1: Implementing waste reduction and recycling programs to minimize environmental impacts.

?   Example 2: Using sustainable materials and minimizing packaging waste in product design and delivery.

             CIRCULAR ECONOMY: A system of production and consumption that minimizes waste and maximizes the use of resources, by designing products for reuse and recycling.

?     Example 1: Protecting customer data through strong data privacy policies and implementing cybersecurity measures to prevent data breaches.

?     Example 2: Ensuring secure and responsible use of emerging technologies such as artificial intelligence and machine learning.

             Environmental, Social, and Governance (ESG) Ratings: Ratings and assessments of companies' environmental, social, and governance performance, are used by investors and other stakeholders to evaluate risk and opportunity.

?     Example 1: Promoting diversity and inclusion in the workplace by implementing policies to hire and retain diverse talent.

?     Example 2: Developing equitable compensation and career advancement opportunities for all employees regardless of race, gender, or other personal characteristics.

KEY CONCEPTS WITH EXAMPLES - 2

ESG stands for Environmental, Social, and Governance, and it is a framework that companies and investors use to assess the sustainability and societal impact of investments. ESG has become increasingly important in recent years as stakeholders demand more transparency and accountability from companies.

Climate Change and Environmental Sustainability

This concept refers to the impact of a company's operations on the environment and its ability to mitigate climate change. Companies that prioritize environmental sustainability are likely to have lower carbon footprints, prioritize renewable energy, and reduce waste.

Examples:

·        Tesla: Tesla is a leading electric vehicle (EV) manufacturer that has a mission to accelerate the world's transition to sustainable energy. By producing EVs, Tesla reduces carbon emissions associated with transportation and promotes the use of renewable energy.

·        Unilever: Unilever, a consumer goods company, has set ambitious goals to reduce its environmental impact, such as becoming carbon neutral by 2039 and using 100% renewable energy by 2030.

Human Rights and Labor Standards

This concept refers to a company's commitment to treating employees and stakeholders fairly and ethically. Companies that prioritize human rights and labor standards may have fair labor practices, prioritize diversity and inclusion, and respect human rights.

Examples:

·        Nike: Nike has taken steps to ensure its global supply chain meets labor standards and treats workers fairly. The company has also prioritized diversity and inclusion, as seen through its efforts to support Black-owned businesses and promote LGBTQ+ equality.

·        Microsoft: Microsoft has implemented policies to promote diversity and inclusion in its workforce and supply chain. The company also has a human rights policy that outlines its commitment to respecting human rights in its operations and supply chain.

Diversity and Inclusion

This concept refers to a company's commitment to promoting diversity and inclusion in its workforce, leadership, and decision-making. Companies that prioritize diversity and inclusion may have diverse boards and leadership teams, prioritize hiring and promoting underrepresented groups, and create inclusive workplaces.

Examples:

·        Airbnb: Airbnb has made efforts to increase diversity in its workforce and leadership, including setting targets for diversity and inclusion and launching programs to support underrepresented groups.

·        Coca-Cola: Coca-Cola has implemented policies to promote diversity and inclusion in its workforce, including setting goals for diverse hiring and promoting a culture of inclusion.

·        Salesforce: Salesforce has a Chief Equality Officer who leads the company's efforts to promote diversity and inclusion. The company has also implemented policies such as the Rooney Rule, which requires diverse candidates to be considered for leadership roles.

ORIGIN AND BACKGROUND OF ESG

ESG stands for Environmental, Social, and Governance, which are the three key factors used to evaluate the sustainability and ethical impact of an investment in a company or business.

The origins of ESG can be traced back to the 1960s and 1970s when socially responsible investing (SRI) began to emerge as a way for investors to align their investments with their values.

However, it was not until the 2000s that the term ESG began to gain widespread use in the investment community.

The idea behind ESG is that companies that prioritize environmental, social, and governance issues are more likely to achieve long-term success and deliver value to their stakeholders, including shareholders, employees, customers, and the wider community.

Environmental factors refer to a company's impact on the natural world, such as its carbon emissions, use of resources, and waste management practices.

Social factors refer to a company's impact on society, such as its labor practices, human rights policies, and community engagement. Governance factors refer to a company's management and leadership practices, such as its board structure, executive compensation, and transparency.

Investors who use ESG criteria to evaluate potential investments are looking for companies that have strong environmental, social, and governance practices, as they believe that these companies are more likely to deliver sustainable long-term returns.

ESG MATERIALITY ASSESSMENT

An ESG (Environmental, Social, and Governance) materiality assessment is a process used by companies to identify and prioritize the ESG issues that are most relevant to their business operations and stakeholders.

The assessment typically involves gathering input from internal and external stakeholders, such as shareholders, employees, customers, and community members, to identify the ESG issues that are most important to them.

The company then uses this information to develop an ESG strategy and set goals and targets for improving its performance on these issues. The assessment is an ongoing process and is typically reviewed and updated regularly to ensure that it remains aligned with the company's evolving business priorities and stakeholder expectations.

The steps in the identification of ESG materiality assessment include:

Stakeholder engagement:

Gather input from internal and external stakeholders, such as shareholders, employees, customers, community members, and other relevant parties, to identify their concerns and expectations regarding the company's environmental, social, and governance performance.

Data collection and analysis:

Collect and analyze data on the company's environmental, social, and governance performance and identify the key issues and risks that are most relevant to the company and its stakeholders.

Materiality assessment:

Use the input from stakeholders and the data collected and analyzed to assess which ESG issues are most material to the company and its stakeholders. This typically involves analyzing the potential impact of each issue on the company's operations, reputation, and financial performance, as well as its potential impact on stakeholders.

Prioritization:

Prioritize the identified ESG issues based on their materiality and potential impact. This will help the company to focus its efforts on the most critical issues.

Communication and reporting:

Communicate the results of the materiality assessment to stakeholders and report on the company's progress in addressing the identified ESG issues.

Review and update:

Regularly review and update the materiality assessment to ensure that it remains aligned with the company's evolving business priorities and stakeholder expectations.

ESG IMPLEMENTATION

The UN Global Compact's 10 principles are as follows:

Human rights:

Businesses should support and respect the protection of internationally proclaimed human rights.

Labor:

Businesses should make sure they are not complicit in human rights abuses.

Environment:

Businesses should support a precautionary approach to environmental challenges.

Anti-corruption:

Businesses should work against corruption in all its forms, including extortion and bribery.

Sustainable development:

Businesses should adopt sustainable practices and consider the environmental and social impact of their activities.

Transparency:

Businesses should publicly disclose their policies and practices regarding the UN Global Compact's principles.

Human rights due diligence:

Businesses should undertake human rights due diligence consistent with the UN Guiding Principles on

Business and Human Rights.

Transparency and anti-corruption: Businesses should report on their anti-corruption efforts by the UN Convention against Corruption.

Climate change:

Businesses should consider the effects of climate change and contribute to a low-carbon economy.

Water:

Businesses should support the responsible management and protection of water resources.

ESG IMPLEMENTATION STEPS

Key features for implementing Environmental, Social, and Governance (ESG) standards:

Adopting international ESG standards and guidelines, such as the United Nations Global Compact or the Sustainability Accounting Standards Board (SASB).

Incorporating ESG considerations into the decision-making process for investment and business operations.

Building partnerships and collaborations with stakeholders, including governments, civil society organizations, and local communities.

Implementing transparent and effective communication and reporting mechanisms for ESG performance.

Embedding ESG considerations into the company's culture and values.

Developing relevant and measurable ESG targets, and tracking progress towards achieving them.

Leveraging technology and innovation to drive sustainable practices and manage risks.

Building local capacities and expertise in ESG management.

Engaging with shareholders and investors to understand and respond to their ESG preferences and expectations.

Supporting local communities and promoting inclusive economic growth.

ESG IN INSURANCE

ESG (Environmental, Social, and Governance) considerations are becoming increasingly important for businesses across industries, including insurance. Insurance companies have a unique role to play in promoting sustainability and managing risks associated with environmental and social factors.

Underwriting:

Insurance companies are beginning to consider ESG factors when underwriting policies. For example, they may charge higher premiums for companies that have poor ESG practices or refuse to provide coverage altogether.

Investment:

Insurance companies are major investors in the market and have a significant impact on the companies they invest in. Increasingly, insurance companies are incorporating ESG considerations into their investment decisions, both to manage risks and to promote sustainability.

Risk management:

Insurance companies are using ESG factors to manage risks associated with climate change, social unrest, and other factors that can impact their clients' businesses. This includes developing new products that provide coverage for environmental risks.

Corporate responsibility:

Insurance companies are also taking responsibility for their own ESG practices, such as reducing their carbon footprint and promoting diversity and inclusion within their organizations.

ESG considerations are becoming increasingly important for the insurance industry as it seeks to manage risks, promote sustainability, and align with the values of its stakeholders.

ESG IMPERMENTATION AS PER SASB

The Sustainability Accounting Standards Board (SASB) is a non-profit organization that develops and maintains industry-specific sustainability accounting standards for publicly listed companies. Its standards guide how to disclose financial material sustainability information to investors comparably and consistently.

Principles:

Materiality: SASB's standards focus on sustainability factors that are financially material to a company's industry and business model.

Relevance: SASB's standards provide information that is relevant to investors and other stakeholders.

Reliability: SASB's standards ensure that sustainability information is dependable, consistent, and comparable across companies in the same industry.

Comparability: SASB's standards allow for the comparability of sustainability information across companies in the same industry.

Clarity: SASB's standards provide clear and concise information that is easy to understand.

Objectivity: SASB's standards are based on objective and verifiable data.

Consistency: SASB's standards ensure consistency in the way companies report sustainability information.

Timeliness: SASB's standards require companies to report sustainability information promptly.

Reasonable: SASB's standards are based on a reasonable cost-benefit analysis.

These principles are consistent with general ESG reporting guidelines and are intended to provide more specific guidance for companies in certain industries, on what ESG factors are important and relevant to report on, to give investors a better understanding of the companies in which they are investing.