Sustainability was first defined in the 1980s by the United Nations (UN) Brundtland Commission as: “meeting the needs of the present without compromising the ability of future generations to meet their own needs.” A growing number of businesses are looking to integrate sustainability into their strategy to operate without negatively impacting the environment and society.
For businesses that are just starting their sustainability initiatives, one of the first steps is to identify and track environmental, social and governance (ESG) metrics.
What is ESG?
ESG is a set of practices and metrics used to evaluate a company beyond its financial performance. Environmental (e.g. pollution), social (e.g. labour standards) and governance (e.g. board diversity and accountability) are the three factors commonly used to measure the sustainability and social impact of a company.
ESG tracking and reporting is becoming increasingly important to boards, management, employees, government, regulators, customers and potential business partners. Most businesses are accustomed to being held financially accountable by stakeholders, but now there is increasing demand for greater scrutiny of internal controls, business culture and customer sentiment.
Think of ESG as metrics for businesses to help protect their reputation, increase valuation, reduce investment and insurance risk, attract better talent, and access better business partners.
In future, ESG will present not only new business challenges, but also new opportunities and solutions across all industry sectors.
Why is ESG important for businesses?
Not only is addressing ESG considered to be an ethical business practice, but it can also help reduce capital costs and improve a company’s valuation. Sustainability reporting and ESG performance tracking are essential when implementing your business’s ESG solutions. Tracking ESG metrics and performance demonstrates to stakeholders that the company is considering business risks from a holistic perspective to be able to support risk mitigation and planning for a changing future.
What factors are part of a company’s ESG program?
Each letter of the ESG acronym has its own areas for organizations to focus on.
Environmental
- Climate change and resilience
- Greenhouse gas emissions
- Biodiversity
- Pollution
- Waste/materials management
- Energy management
- Water management
- Air quality
- Supply chain
Social
- Human rights
- Labour practices
- Diversity, equity and inclusion
- Data privacy and security
- Community relations (i.e. indigenous)
- Health and safety
- Supply chain
Governance
- Anti-corruption
- Anti-bribery and money laundering
- Compliance
- Audits
- Transparency
- Corporate leadership
- Risk management
Challenges in measuring business ESG performance
While measuring ESG metrics and performance is important for companies, ESG reporting doesn’t come without some challenges.
These may include:
- The risk of greenwashing (i.e. enhancing the characteristic of an ESG process or a product to make it appear sustainable/green to increase the company's ESG ranking)
- The lack of standardized guidance on ESG frameworks (what to measure, how to measure etc.)
- The availability and quality of ESG data (i.e. GHG emissions, reports, policies)
- The understanding of and adjustment to the latest sustainability trends, insights and priorities (ESG is continuously evolving and pivoting its focus)
- The inconsistency in performance across ESG pillars i.e., a company might be excelling well in the Environmental pillar while falling short in the Social and Governance pillars.
To learn more about how we can help, contact arms.canada@aviva.com.
Sources:
United Nations: Academic impact
Aviva: ESG Spotlight: the risks and benefits uncovered
Morningstar: How ESG Investing Can Reduce Risk
BDC: ESG in Canada: What the data tells us
Forbes: 17 Sustainability Initiatives Of Businesses That Are Going Green
