Environmental, Social, and Governance (ESG) Framework – Thematic Research

Sustainability used to be just about saving the planet. Today it has morphed into an umbrella term for environmental, social, and governance (ESG) issues. GlobalData’s ESG framework, can be used to assess a company’s ESG performance, the factors that contribute to negative ESG consequences, and mitigating actions that can improve a company’s ESG performance.

What is the significance of ESG?

ESG is a complex and wide-reaching subject that is often approached in a piecemeal, reactive manner. There are no global standards for ESG reporting yet, so it can be difficult for CEOs to know where to start. The disclosure landscape has become overcrowded, with multiple overlapping disclosure frameworks from the Sustainability Accounting Standards Board (SASB) to the Global Reporting Initiative (GRI) and many others.

To maximize profit CEO’s must embrace ESG. CEOs that are too slow to improve their company’s approach to sustainability will see an exodus of customers and a drop in profits far sooner than they ever imagined.

What are the major environmental factors influencing corporate activity?

Environmental performance measures how corporate activity contributes to climate change, pollution, biodiversity, and the depletion of the world’s natural resources.

Climate change

Climate scientists overwhelmingly agree that the global economy must reach net-zero greenhouse gas (GHG) emissions by 2050 to ward off the catastrophic effects of climate change. Despite this scientific consensus and broad agreement that climate change will disrupt every sector of the global economy, governmental action has not been sufficient to establish a path to net-zero.

Pollution

Most pollution is caused by industrial and domestic waste products. Pollution occurs in four primary forms: air pollutants, water pollutants, land pollutants, and space pollutants. All forms of pollution can adversely affect human health and cause environmental damage.

Biodiversity

In the last few decades, rapid urbanization and industrialization have led to a significant decline in our planet’s biodiversity. According to the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), biodiversity loss is one of the top two dangers facing the world.

Natural resources

The world’s natural resources including fossil fuels, metals, minerals, land, water, and fish are limited in supply. Humans are depleting natural resources at an alarming rate. The long-term sustainability of our planet depends on the careful management of natural resources.

What are the major social factors influencing corporate activity?

The social impact of business happens through human rights, diversity and inclusion, health and safety, and community impact.

Human rights

Every individual is entitled to basic rights and freedoms during their lifetime. Human rights violations can come in many forms, including forced labor, child labor, displacement of indigenous people, data breaches, low wages, lack of citizenship rights, and job insecurity.

Diversity and inclusion

Discrimination based on gender, disability, religion, race, age, ethnicity, or sexual orientation continues to be a global problem.

Health and safety

Organizations must safeguard employees, customers, and suppliers from physical and mental harm. Every year, a huge sum of people suffers from work-related injuries and accidents.

Community impact

Companies have a social obligation to act responsibly towards the communities in which they operate. Community neglect refers to the failure to support or hire individuals from local communities.

What are the major governance factors influencing corporate activity?

Corporate structure, risk management, corruption and bribery, and ethics can all negatively impact an organization’s governance.

Corporate structure

A corporate structure is typically defined by the company’s founders. This structure is unlikely to change much until a major event, such as a listing or a new tax structure, necessitates change. Poorly designed corporate structures can cause many problems. Executives can be paid too much and workers too little. The company’s strategy can result in conflict with shareholders or other stakeholders.

Risk management

Companies that manage risks and mitigate their impact are more likely to remain profitable long into the future. By contrast, poor risk management can expose a business to numerous threats, from natural disasters to financial uncertainties and legal liabilities, which could significantly jeopardize an organization’s future viability.

Corruption and bribery

Corruption can take the form of extortion, fraud, deception, collusion, and money laundering. Bribery is also a form of corruption. The most common form of bribery is kickbacks, which involve payment of a commission in exchange for services. Another widespread form of bribery is facilitation payments, where money is paid to speed up or facilitate routine actions.

Ethics

In today’s social media-dominated world, companies with unethical practices can fast become the target of consumer and shareholder ire. This can lead to a failure to attract top talent and the loss of business.

Report scope

 Scope

• Adopting a holistic approach that encompasses all environmental, social, and governance issues can help company leaders to ensure all aspects of sustainability are covered in their ESG strategy. In 2022, the pressure will mount on companies to be more transparent about their ESG credentials. We designed the GlobalData ESG framework to help companies build trust with society and set them on a path towards a sustainable future.
• Environmental performance measures the energy a company consumes, the waste it generates, the natural resources it uses, and the consequences for our habitat. Climate change is increasing the frequency of extreme climatic events, and these climatic changes will have direct, negative consequences for all businesses. One certainty is that climate change will bring about many uncertainties, increasing the risk for companies and delaying investments.
• Social performance assesses a company’s engagement with its workers, customers, suppliers, and the local community. It covers human rights, diversity and inclusion, health and safety, and community impact. Social injustices created by big business can generate negative publicity, ensure that companies fail to capture the benefits of a diverse workforce, and lead to issues around regulatory compliance.
• Governance assesses how a company’s internal controls are used to inform business decisions, comply with the law, and meet moral obligations to external stakeholders. Repeated failures in corporate governance—from aggressive tax avoidance to corruption, excessive executive remuneration, and relentless lobbying—has meant that society is losing trust in big business.

Key Highlights

In January 2020, we predicted that ESG would be the most important theme discussed in corporate boardrooms. Since then, there have been significant lasting changes to how we interact, work, and consume. Nobody could have predicted the scale of disruption caused by the COVID-19 pandemic, and it has highlighted the importance of ESG. According to GlobalData’s ESG Strategy Survey 2021, 67% of ESG executives believe that the pandemic has acted as a catalyst for increased focus and action on ESG issues.

ESG will continue to drive strategic and operational decisions for all corporate boards in a post-pandemic world. Social inequality, corruption, tax avoidance, and climate change are all issues that companies must address head-on, in full public view.

While some companies are making concerted efforts to improve their ESG performance across many areas, others are simply paying lip service to the concept of sustainable profits. The market is scrutinizing corporate ESG strategies, making greenwashing increasingly difficult.

Reasons to Buy

• ESG will be the most important theme discussed in corporate boardrooms worldwide this decade. While previous decades have witnessed environmental movements, the current wave of sustainability consciousness is unprecedented. Each new climate-related emergency, human rights violation, or corruption scandal reinforces the public opinion that companies must take meaningful steps to address environmental, social, and governance issues.

• ESG has and will continue to govern how business is conducted globally. Stakeholders are demanding greater transparency and action on a full spectrum of ESG issues, and those that take ESG seriously will be better placed to succeed in the future.