ESG: The three pillar of sustainability

ESG: The three pillar of sustainability

1. Introduction:

- Define ESG and its significance in the modern business landscape.

- Briefly introduce the three pillars: Environmental, Social, and Governance.

ESG stands for environmental, social and governance. These are called pillars in ESG frameworks and represent the 3 main topic areas that companies are expected to report in.The goal of ESG is to capture all the non-financial risks and opportunities inherent to a company's day to day activities.

Our world faces a number of global challenges: climate change, transitioning from a linear economy to a circular one, increasing inequality, balancing economic needs with societal needs. Investors, regulators, as well as consumers and employees are now increasingly demanding that companies should not only be good stewards of capital but also of natural and social capital and have the necessary governance framework in place to support this.More and more investors are incorporating ESG elements into their investment decision making process, making ESG increasingly important from the perspective of securing capital, both debt and equity.

Embedding ESG factors into a business' operations can help them reduce its environmental and social impact, manage risks more effectively, and succeed long-term.

It can also help build the reputation of the brand and appeal to the investors about there sustainability practices.

What started as a corporate social responsibility initiative by the United Nations 20 years ago has swelled into the Environmental, Social, and Governance (ESG) movement.

Can be considered as future of sustainable investing.

2. Environmental Pillar:

- Explain the importance of environmental sustainability.

- Discuss key factors such as climate change, resource depletion, and pollution.

- Provide examples of companies implementing environmentally sustainable practices.

- Analyze the impact of environmental initiatives on businesses and society.

Emissions such as greenhouse gases and air, water and ground pollution emissions. Resources use such as whether a company uses virgin or recycled materials in its production processes and how a company ensures that from cradle to grave the maximum material in their product is cycled back into the economy rather than ending up in a landfill. Similarly, companies are expected to be good stewards of water resources. Land use concerns like deforestation and biodiversity disclosures also fall under the Environmental Pillar. Companies also report on positive sustainability impacts they might have, which may translate into long-term business advantage.From a reporting perspective this is the most complex pillar.

Climate change, pollution, and waste are some of the most prominent issues companies face today. Still, several other factors could threaten the company's long-term financial health and existence. A few of these include:

Using fossil fuels as a source of energy or being dependent on them

The way in which water and other natural resources are used or managed by it

The level of pollution in the air

Changes in the climate are occurring

Safely managing and disposing of hazardous materials

Using renewable energy and carbon footprint

The best opportunities that investors look at are:

The use of renewable energy and fuel sources is becoming increasingly popularConserving resources and minimizing pollution through the use of efficient processes

Reduce your carbon footprint or adopt a carbon-neutral stance

Restoring the planet by planting trees

Initiatives to reduce pollution

This is important for the companies involved in thr chemical,energy and utility industry.

The Environmental (E) pillar of ESG assesses how an industry affects the environment by considering elements such as carbon footprint, pollution levels, resource management, dependence on fossil fuels, and efforts to address climate change. Addressing these issues is essential to the long-term financial stability of a company.[73] Investors identify opportunities in eco-friendly activities, which can lead to competitive advantages in eco-friendly goods and services. Examples of these practices include the use of renewable energy, resource conservation, pollution reduction, and reduced carbon footprints.[74] Despite the ESGs attention, there is a significant research gap in the implementation of ESG practices to reduce carbon emissions in the industry.[75]

A recent OECD evaluation on ESG assessed different E-score approaches. Both high and low correlations were found when comparing the E pillar score with the total ESG scores from various providers. This is because the rating agencies use different ESG measurements and primarily focus on environmental issues. The OECDs study gives different surprising results. First, the research indicates that a higher score on the overall E pillar is not always associated with a low environmental effect by analyzing factors such as total CO2 and CO2 equivalent emissions, total waste created, total energy utilized, and total water usage. Unexpectedly, the general E pillar score and total CO2 emissions were found to be positively correlated. Secondly, two providers report that CO2 emissions are typically greater in companies with the highest ESG rankings. Similarly, different data providers assign higher E pillar scores to organizations that generate more hazardous and non-hazardous waste.[42] Moreover, The influence of regulatory pressures in lowering businesses' pollution emissions is enhanced by environmental compensation. This implies enhanced environmental performance results from the combination of successful self-regulation achieved through governance mechanisms and regulatory pressure.[76]

So having a high ESG score does not always seem to always have a positive and measurable effect on the environment, but leads to more financial incentives: a higher profit and larger market shares.[77]

3. Social Pillar:

- Explore the social aspects of sustainability, including diversity, human rights, and labor practices.

- Highlight the role of businesses in promoting social equity and community development.

- Showcase case studies of companies addressing social issues effectively.

- Discuss the benefits of socially responsible practices for companies and stakeholders.

Under the Social Pillar companies report on how they manage their employee development and labour practices. They report on product liabilities regarding the safety and quality of their product. They also report on their supply chain labour and health and safety standards and controversial sourcing issues. Where relevant companies are expected to report on how they provide access to their products and services to underprivileged social groups.l

HGender diversity and equality in the workplace

Concerns regarding the safety and liability of products

Taking care of the health and safety of your employees is of the utmost importance

Providing training and development

Drug abuse, gambling, and reproductive choice are topics related to physical and mental health

The transparency of the supply chain is of utmost importance

The right to human dignity

Concerns regarding privacy

Fair pay for employees, including a living wage.

Diversity, equity and inclusion (DEI) programs.

Employee experience and engagement.

Workplace health and safety.

Data protection and privacy policies.

Fair treatment of customers and suppliers.

Customer satisfaction levels.

Community relations, including the organization's connection to and impact on the local communities in which it operates.

Funding of projects or institutions that help poor and underserved communities.

Support for human rights and labor standards

D

The social pillar deals with the assessment of both internal (workers) and external relationships (local community/consumers). This pillar focuses on human rights, privacy policies, working conditions, and initiatives that benefit underprivileged communities, among other things. Studies have shown that if the quality of the internal and external relationship is good, it generates a positive effect on the benefits of local sustainable development and worker well-being, as well as indirect financial benefits in addition to the financial performance of businesses.[68] Particular contexts such as the COVID-19 pandemic have emphasized the pressure of the S-pillar. Indeed, in this particular context, the inequalities increase and most disadvantaged groups suffer more than the others.[69]

However, there is a gap inside the regulatory framework because there is no common agreement on the assessment of the social pillar. Therefore, the rating agencies dont use the same metrics which create a high divergence in the different evaluations.[68] Moreover, the social pillar is difficult to measure because it relies on social aspects that are empirically limited and quantifiable, e.g. it refers to notions such as well-being, and discrimination which needs a deep understanding with a detailed analysis. To conclude, assessing the real effects of the social pillar is very tough.[69]

4. Governance Pillar:

- Explain the significance of good governance in sustainability efforts.

- Discuss aspects like transparency, accountability, and ethical leadership.

- Illustrate how strong governance can mitigate risks and enhance long-term value.

- Provide examples of companies with robust governance structures and their impact.

overview of an organization's internal operations and business behavior.

Company leadership and management.

Board composition, including its diversity and structure.

Executive compensation policies.

Financial transparency and business integrity.

Regulatory compliance andrisk managementinitiatives.

Ethical business practices.

Rules on corruption, bribery, conflicts of interest, and political donations and lobbying.

Whistleblower programs.

The main issues reported under the Governance Pillar are shareholders rights, board diversity, how executives are compensated and how their compensation is aligned with the companys sustainability performance. It also includes matters of corporate behaviour such as anti-competitive practices and corruption.

The firm leadership, internal controls, audits, board diversity and composition, strategies, and policies are all included under the governance pillar.[70] Regarding governance, it has been found that the financial performance of a business is influenced by its decision-making body. For instance, gender diversity improved CSR, decreased corporate social irresponsibility, and as a result, improved business performance. The size of a company's board and management experience were strongly correlated with its financial performance.[42] CSR describes the sustainability tactics used by companies to make sure their operations are ethically acceptable. On the contrary, ESG are employed to evaluate the overall sustainability of an organisation. ESG are used as measures.[71]

The Governance pillar offers considerable and high portfolio returns, according to early research using the ESG filter on value profitability and momentum indicators. In agreement with some findings, when the entire sample is taken under consideration, the environmental and governance indicators have a considerable negative effect on portfolio volatility and a favorable effect on portfolio return growth.[72] According to the countries, some indicators are less important than others, and one of the last contributing ESG performance scores for the developing countries is governance.[70] It is important to note that the G scores (as well as the S score) are subjective measures and are more likely to be manipulated to elevate ESG performance. These two pillars (G and S) are also more subjected to greenwashing.[70]

5. Integration and Interconnectivity:

- Analyze how the three pillars intersect and influence each other.

- Discuss the importance of a holistic approach to sustainability.

- Highlight the synergies and trade-offs between environmental, social, and governance considerations.

- Explore how companies can achieve balance and integration across all three pillars.

6. Challenges and Opportunities:

- Address common challenges in implementing ESG initiatives, such as measuring impact and stakeholder engagement.

- Discuss emerging trends and opportunities in the ESG space.

- Provide insights into overcoming obstacles and leveraging opportunities for sustainable growth.

7. Conclusion:

- Summarize the key points discussed in the article.

- Emphasize the importance of ESG for businesses, investors, and society as a whole.

- Encourage readers to consider ESG factors in decision-making and advocate for sustainable practices.

Promotes Healthy Living: We can promote a healthier lifestyle for everyone by investing in renewable energy sources like solar and wind energy and creating jobs in the local community.

Affirms Equality: The sustainability concept ensures equal treatment for everyone, regardless of race, sex, or gender. We can achieve this by eliminating poverty and inequality in our world as a result of this.

Protects our Environment: Through waste reduction, wildlife preservation, and climate change mitigation, sustainable practices facilitate the protection of the environment.

Enriches the global economy: ESG and sustainability promote ethical business practices that, over time, are advantageous to both people and the environment. This enables a more robust global economy and improved living circumstances in emerging nations.

Another bias that the ESG instrument can exhibit is that larger companies generally have higher ESG scores compared to small and medium-sized enterprises (SMEs). Sustainability reports are self-declared and unaudited, resulting in companies being presented in the best light possible. Furthermore, several studies have demonstrated significant data omissions, inaccurate figures, and unfounded claims.

The gap between the performance of large corporations and SMEs can have various explanations. According to studies, companies that provide more robust information tend to receive higher ESG scores, even if they have historically weak ESG practices or correspond to a higher overall ESG risk. The best ratings for these companies may be linked to their enhanced ESG compliances or because they allocate more resources to the preparation of their non-financial reports. For instance, Bristol-Myers Squibb, a large pharmaceutical company, maintains a high ESG rating even after being involved in recent controversies. In contrast, Phibro Animal Health, a small pharmaceutical company, receives a lower score, despite its commitments and compliances with ESG criteria.

ESG investing as the consideration of environmental, social, and governance factors alongside financial factors in the investment decision-making process.

Environmental aspect: Data is reported on climate change, greenhouse gas emissions, biodiversity loss, deforestation/reforestation, pollution mitigation, energy efficiency and water management.

Social aspect: Data is reported on employee safety and health, working conditions, diversity, equity, and inclusion, and conflicts and humanitarian crises,[46] and is relevant in risk and return assessments directly through results in enhancing (or destroying) customer satisfaction and employee engagement.

Governance aspect: Data is reported on corporate governance such as preventing bribery, corruption, Diversity of Board of Directors, executive compensation, cybersecurity and privacy practices, and management structure.

Issues driving Morningstar / Sustainalytics ESG Risk Ratings[47]

Category Issue Contribution to

ESG Risk Rating

Environmental

43.3% Carbon - Own Operations 19.2%

Resource Use 10.3%

Emissions, Effluents and Waste 7.1%

Environmental and Social Impact

of Products and Services 6.7%

Social

34.1% Human Rights 22.8%

Occupational Health and Safety 7.5%

Community Relations 3.8%

Governance

22.6% Corporate Governance 11.9%

Business Ethics 6.7%

Human Capital 4.0%

Effects on the firm's performance

A company's financial performance represents its overall financial health-in other words, it's used to verify the company's viability and growth potential.[99]

Integrating ESG criteria into products has an effect on company performance. According to a 2015 study by Fried, Bush & Bassen, there is a positive link, which has been proven in 90% of cases, between ESG performance and financial performance. This positive link can be explained by a reduction in risk exposure. Integrating ESG criteria mitigates potential ESG-related risks. For example, complying with environmental standards avoids certain sanctions that would affect the financial side.[100] Another study points in the same direction, claiming that publishing sustainability reports improves financial performance,[101] and reputation, and it leads to the creation of a significant competitive advantage for the company.[102] In addition, this disclosure is positively associated with return on equity].[41]

Companies that adopt ESG criteria are more inclined to generate higher profits,[41] as investors are more oriented towards more ecologically friendly and sustainable products.[41] These investors are now taking more account of these guidelines in their investment decisions. In other words, the aim of integrating an ESG policy is to have a positive effect on financial performance to cover the costs it generates.

Despite the positive correlation between the inclusions of ESG criteria and financial performance, it does not imply that companies' primary aim is to become socially and environmentally responsible. According to Friedman (1962), "a company's main objective is to increase the wealth of its stakeholders". Furthermore, the ESG hype is a good opportunity for many corporate investors to make money. There are still no universal criteria for assessing whether a fund is ESG or not. Investors rely on ratings to make their investments, but these ratings do not always reflect a complete picture of ESG performance, because they are based on incomplete data supplied by the company itself. Good ESG performances attract and retain investors. Finally, although many studies show a positive relationship between good ESG performance and financial performance, other studies prove that it is difficult to quantify the real financial effect of an improvement in a company's social performance.[100]

Assigning a precise monetary value to ESG issues is proving complex, if not arduous. Quantitative models and established ESG ratings do not always adequately capture these values, making it difficult to integrate them into investment decisions based on short-term financial data.[103]

Initially, studies focused on the effect of CSR on financial performance, using models such as the CAPM. Early research, such as that by Alexander and Buchholz in 1978, found no significant link between socially responsible actions and stock market returns. Subsequent studies, such as those by Cochran and Wood in 1984, Aupperle, Carroll and Hatfield in 1985, and Blackburn, Doran and Shrader in 1994, confirmed this lack of correlation between ESG and corporate financial performance, despite differing methodological approaches.

Even when studies have attempted to specifically measure performance about CSR, such as that by Aupperle, Carroll, and, Hatfield in 1985, using risk-adjusted profitability measures, they have reached similar conclusions: the absence of a significant relationship between CSR and corporate profitability.

Research findings

According to a 2021 study done by the NYU Stern Center for Sustainable Business, which looked at over 1,000 studies, "studies use different scores for different companies by different data providers."[182]

Gallup finds that 28% of U.S. employees strongly agree with the statement, "My organization makes a positive impact on people and the planet."[183]

Research shows that such intangible assets comprise an increasing percentage of future enterprise value.[20]

A study published by the European Securities and Markets Authority has also found that "ESG generally improves returns and cuts client costs over time".[184] Analysis over a five-year period showed stock funds weighted towards ESG scores generally performed higher: an increase in annual average return of 1.59% in European markets, 1.02% in Asia-Pacific markets, and 0.13-0.17% in North American and global markets.[185]

In January 2023, a Rasmussen opinion poll in the U.S. reported that the proportion of Americans who considered the promotion of "causes like diversity and environmentalism" to be the most important aim for companies was 9%. 69% said that the focus should be on "providing quality goods and services," and 13% on "increasing profit".[186] A poll by PricewaterhouseCoopers found that "83% of consumers think companies should be actively shaping ESG best practices", with 76% of consumers saying they would "discontinue relations with companies that treat employees, communities and the environment poorly".[187]

There is a increase in companies in India as well reporting on ESG issues.

Hungarian Stock Exchange (BT) has issued a recommendation to all issuers that they develop an ESG reporting roadmap by the end of the year.

EU on the ESG reports.

Different sectors have different ESG perspectives to look at called materiality.

Typically materiality is determined based on what ESG issue is considered financially material in a given industry. Financially material issues are those that can impact a company's financial performance (e.g.: unexpected surplus costs, fines, loss of brand value, loss of revenues due to consumers choosing more sustainable alternatives). Increasingly double materiality is being recognised as an important concept in choosing what is considered material by a company. Double materiality means alongside financially material issues, socially material issues are also treated as material.

The 2 most commonly used reporting frameworks are the Global Reporting Initiative (GRI) and the Sustainable Accounting Standards Boards standards (SASB).

ESG reporting efforts are part of broader landscape of sustainability issues. how your company aligns with the various aspects of global sustainability issues.

ESG report is something that shows to stakeholders that your company is concerned for the sustainability issues around by working on the issues.

Sustainable investment and an ethical investment can be measured by these three key factors defining its sustainability and ethical impact

ESG and sustainability criteria are increasingly being used by investors who are socially responsible when screening potential investments.

there are no official guidelines or rules about how this should be done with respect to ESG criteria and provide the selection for those sort of investments.

Its importance

There is also the possibility of using ESG principles as a benchmark to measure a company's performance against its competitors' performance. For example, it has been shown that businesses that adhere to ESG guidelines are more likely to be regarded as reliable investments and are more likely to have higher stock prices than those whose policies do not follow ESG guidelines. Further, there is undoubtedly a critical point to be made: ESG-integrated ways of doing business can significantly help businesses when it comes to gaining access to capital markets that pose a challenge or could be very costly.

Our future will be brighter if we embrace ESG: the three pillars of Sustainability. Our responsibility is to ensure the healthy and well-being of the planet, as well as to ensure equality and justice for all. The key to achieving this goal is to work together and follow the three pillars of sustainable development to ensure our success.

The goal is to demonstrate that your company is a good steward of all forms of capital. Not just financial but environmental and social as well. Dont treat ESG reporting as just a compliance exercise, your task is not just about reporting on ESG issues. By collecting data, you are also taking the first steps towards managing ESG issues in the same manner as you would manage financial issues.

It is predicted that ESG assets could hit $53 trillion by 2025, a third of global assets under management. Bloomberg 2021source

When is a proper CG in the company then there is no need to look at the financial separately because it in other reporting part of it in the evaluation and all.

For example, a company with poor environmental practices may be subject to increasingly strict regulation, which could hurt profits.

A company with poor social practices may also face reputational damage, leading to lost customers and revenue.

Finally, a company with weak governance practices may be more likely to experience fraud or other financial problems.

However, the primary legislation for integrated ESG reporting in India is the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 and circulars issued thereunder (and is hence applicable only to listed companies).

The emerging ESG reporting landscape of the Indian market regular Securities Exchange Board of India (SEBI) seems to be intent on reflecting these ethos, leading to a search towards a golden balance between growth and environment

ESG would focus on the sterile shareholder capitalism which considers the ecology and the earth and the society as resources available for exploitation rather than for co-existence.

BRSR is the best of all reports around the world and is mandatory for the top 1000 listed companies in the market which is introduced by SEBI.

A study by ECGI pointed out that 29 countries had some sort of mandatory disclosure requirements in 2022.

SEBI had become a trendsetter in ESG trendsetter in terms of pace of disclosures and level of disclosure and the innovative parameters.

insights into their non-financial business risks and opportunities