The term ESG is short for environmental, social and governance.
In ESG frameworks, these are referred to as “pillars,” and they stand for the three primary subject areas that businesses are supposed to report on.
The objective of ESG is to identify all non-financial risks and opportunities that are present in a company’s daily operations.
The three pillars include:
Corporate climate policy, energy use, waste disposal, pollution, the preservation of natural resources, and the treatment of animals are a few examples of environmental challenges.
ESG factors can also be used to assess any potential environmental concerns a business may face and how it is addressing those risks.
Social factors examine the organisations interactions with internal and external stakeholders.
This particular aspect of ESG is highlighted by the investment strategy known as socially responsible investing (SRI).
In addition to battling against racial, gender, and sexual discrimination, SRI investors look for businesses that support moral and socially conscious ideals like diversity, inclusiveness, community focus, social justice, and corporate ethics.
ESG governance guidelines make that a business employs correct and open accounting practises, selects its executives with integrity and diversity in mind, and is answerable to shareholders.
ESG investors could demand guarantees that businesses don’t choose board members and top executives who have conflicts of interest, don’t utilise political donations to get special treatment, or don’t engage in criminal activity.
Why is it important?
Before investing, investors analyse a company’s environmental, social, and governance practises, which has become a new trend.
Some businesses have begun ESG reporting in order to attract investors by sharing information about their activities in these three categories.
A company’s ESG rating gauges its exposure to long-term risks, and a positive ESG rating might attract investment as ESG investing becomes more prominent.
ESG reporting: Is it required?
ESG reporting is growing more common around the world, with some nations enacting legislation to make it mandatory.
Thailand now mandates listed firms to provide ESG reports, and the House of Representatives has passed legislation requiring public corporations to reveal how ESG measures affect their business strategy.
The measure would order the Securities Exchange Commission to update its disclosure guidelines so that any filing requiring audited financial statements must also include ESG criteria.
ESG reporting is likely to become a universal requirement for publicly traded corporations in the future.