Among the never-ending stream of acronyms, we hear and try to understand on a daily basis, ESG. The acronym for Environmental, Social, and Governance has taken the corporate world by storm. Globally, organizations across all industrial sectors have been allocating more and more resources toward improving ESG performance. On the investment front, inflows into environmentally and socially responsible projects rose from US$ 5 billion in 2018 to more than US$ 50 billion in 2020 and then to nearly US$ 70 billion in 2021. According to reports, midway through 2022, global sustainable assets were approximately US$ 2.5 trillion. In Pakistan, whether in true spirit or just because of mimetic, normative or regulatory pressures industrial sectors are embedding this business ideology in the day-to-day business operations. Organizations are creating ESG Departments, advertising vacancies for ESG specialists, reporting ESG performance, and promoting the adoption of this ideology on websites and annual reports.
But before we are driven away by the fast flow of this emerging ideology let us take a step back and understand the What, the How and the Why of ESG so that it can be adopted, implemented, and customized to yield maximum positive returns for Pakistan’s economy. First things first, WHAT exactly does ESG mean? The roots of this ideology can be traced back to 2004, in which the United Nations Global Compact and the Swiss Federal Department of Foreign Affairs published a report named “Who Cares Wins”, in which the term ESG was coined. Developed by a number of stakeholders, including the International Finance Corporation (IFC), this report urged analysts to better incorporate Environmental, Social and Governance (ESG) factors in their research. With time, this concept evolved based on several initiatives and was ultimately defined as “a set of environmental, social, and governance factors considered by companies when managing their operations, and investors when making investments, in respect of the risks, impacts, and opportunities”. In the current scenario organizations are truly embracing this dynamic business ideology instead of just using the term for “greenwashing”, “purpose washing,” or “woke washing.
ESG ideology requires an organization to adopt socially responsible business behaviour through job creation and improved working conditions
ESG is a framework for sustainability management, ethical practices and conscious consumerism that is gaining widespread popularity in the business world. ESG adoption requires understanding What the E, S and G actually mean for the business policies and procedures. So, let us break down this ideology. The ‘E’ in ESG stands for Environment and it revolves around the idea that organizations rely on natural resources and physical assets to perform their business operations. Products and business operations may directly or indirectly impact the environment adversely. ESG calls for increased environmental responsibility and accountability as part of daily business operations. Organizations’ connection with various issues such as climate change, carbon management, resource depletion, loss of biodiversity, energy consumption, water conservation, etc. stems out of this ESG component. Moving towards the ‘S’ in ESG, it can be understood as the organization’s impact on society. The products and services of a company or the operating activities involved in production may benefit society or cause harm. ESG ideology requires an organization to adopt socially responsible business behaviour through job creation and improved working conditions, providing equal employment opportunity, managing workplace diversity, and creating positive impacts on local communities through products and services and CSR activities. Under ESG, Governance means that when making decisions and allocating their natural, human, and financial resources, companies should consider how they will create long-term value that will benefit all stakeholders. This is reflected through the organization’s defined purpose, values and culture, the diversity, structure and oversight of the top management, the organization’s risk management strategy and scope, ethical and compliance policy, shareholder’s rights, and disclosure and transparency practices.
A precondition for creating long-term sustainable value is to manage, and address, massive, paradigm-shifting externalities such as environmental and societal impacts. Thus, integrating ESG into the business philosophy ensures that the business endures, with societal support, in a sustainable, environmentally viable way. The most important aspect of understanding this business ideology is that adopting ESG does not mean decreased economic sustainability of the business. True ESG is consistent with a company’s well-considered strategy and advances its business model. This business philosophy proposes environmental and social sustainability, ultimately leading to economic sustainability. The true essence of ESG is the creation of congruence, synergy, and equilibrium within these three dimensions of corporate sustainability.
Today when we look at the climate change impacts plaguing our planet, the words of Charles Darwin seem true. He said, “It is not the strongest of the species that survives, nor the most intelligent; it is the one most adaptable to change”. It is time that business ideology reinvents itself on the basis of ESG and the pathway for human survival depends on this transition towards ESG.
(To Be Continued)
The writer has a PhD in Green Banking and works as a Chief Manager Green Banking Office at Bank AL Habib Limited, Pakistan. He can be contacted at [email protected]