What does ESG mean? Two business scholars explain what environmental, social and governance standards and principles are

There are many environmental, social and governance principles worth considering. ArtemisDiana/iStock via Getty Images Plus

by Luciana Echazú, University of New Hampshire and Diego C. Nocetti, Clarkson University

Environmental, social and governance business standards and principles, often referred to as ESG, are becoming both more commonplace and controversial.

But what does “ESG” really mean?

It’s shorthand for the way that many corporations operate in accordance with the belief that their long-term survival and their ability to generate profits require accounting for the impact their decisions and actions have on the environment, society as a whole and their own workforce.

These practices grew out of long-standing efforts to make businesses more socially and environmentally responsible.

ESG investing, sometimes called sustainable investment, also takes these considerations into account.

Zeroing in on the E, S and G

ESG priorities vary widely, but there are some common themes.

These priorities usually emphasize environmental sustainability – the E in ESG – with a focus on contributing to efforts to slow the pace of climate change.

There’s also an effort to uphold high ethical standards through corporate operations. These social concerns – the S – can include, for example, ensuring that a company doesn’t buy goods and services from exploitative suppliers, or treats its employees well. Or it might entail taking care to hire and retain a diverse workforce and taking steps to reduce social injustices in the communities where a corporation operates.

Companies embracing ESG principles should also have high-quality governance – the G. Governance includes oversight, handled by a competent and qualified board of directors, regarding the hiring and firing of top corporate leaders, executive compensation and any dividends paid to shareholders.

Governance also pertains to whether a company’s leadership operates fairly and responsibly, with transparency and accountability.

Why ESG matters

By 2026, the total amount invested globally according to these principles will nearly double to US$34 trillion from $18.4 trillion in 2021, the accounting firm PwC estimates. However, increasing scrutiny of which investments really qualify as ESG could mean it takes longer to reach that volume.

This corporate concept is becoming a political touchstone in the U.S. because some states, like Florida and Kentucky, arguing that these practices divert from the focus on maximizing profits and can be detrimental to investors by making other considerations a priority, have barred their pension funds from using ESG principles as part of their investment considerations. Some very large asset managers, including BlackRock, aren’t allowed to work with those pension funds anymore.

Many of the arguments against embracing these principles hold that they reduce profits by taking other factors into account. But how do ESG practices affect financial performance?

A team of New York University scholars looked at the results of 1,000 different studies that had sought to answer this question. It found mixed results: Some of the studies found that ESG principles increased returns, others found that they weakened performance, and a third group determined that these principles made no difference at all.

It’s possible that the disparities among results could be due largely to the lack of clarity regarding what counts and does not count as ESG, which has been a long-standing discussion and makes it hard to assess how ESG investments perform.

The NYU scholars also found two consistent results regarding ESG strategies. First, they help protect investors against risks such as losses resulting from the failure of a supply chain due to environmental or geopolitical issues, and they can protect companies from volatility during periods of economic instability and downturns. Second, investors and companies benefit more from ESG strategies in the long term than in the short term.

Luciana Echazú, Associate Dean of Undergraduate Education; Associate Professor of Economics, University of New Hampshire and Diego C. Nocetti, Dean, School of Business; Professor of Economics and Financial Studies, Clarkson University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

ESG Boycott Legislation in States: Municipal Bond Market Impact

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In more than a dozen states across the country, state legislatures have either passed or have pending bills based on a piece of model legislation developed by the American Legislative Exchange Council known as the “Energy Discrimination Elimination Act.” These bills would essentially pull state funds from investment managers if they are deemed by government officials to be adverse to the oil and gas and coal industries in their investment strategies. Some of the same states – in addition to many others – are considering bills that would similarly punish or blacklist financial firms for including having strong Environmental, Social, and Governance (ESG) standards in their investment strategies.

The legislation has been accompanied by actions at other levels of government, including state executive actions by treasurers and governors, legal action by state attorneys general, and even the threat of federal action in the next Congress. At the tip of the spear of the state efforts to pressure financial institutions away from assessing and acting upon the financial risks of such issues as climate change, gun violence, and workers’ rights is the threat of pulling state funds from their asset managers.

Among many key unknowns associated with these legislative and executive actions are impacts to the residents and taxpayers of the states where they become law. Setting aside the implications of politics interfering in financial decisions, there is the question of how removing major, proven financial companies from the marketplace will affect competition. Restrictions on financial market participants, (and in this analysis we look at large investment banks), alter the outcomes of municipal bond market transactions and modify contractual engagements with state governments. It is therefore of tremendous importance that policymakers, business leaders, and the public have the tools to estimate and anticipate these impacts.

Gas, Guns, and Governments: Financial Costs of Anti-ESG Policies

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We study how regulation limiting ESG policies distorts financial market outcomes. In 2021 Texas enacted laws that prohibit municipalities from contracting with banks with certain ESG policies, leading to the exit of five of the largest municipal bond underwriters from the state. Issuers previously reliant on these underwriters face higher uncertainty and borrowing costs since the enactment of the laws. These effects are consistent with deterioration in underwriter competition as issuers face fewer potential underwriters. Texas issuers will incur $300-$500 million in additional interest on the $31.8 billion borrowed during the first eight months following enactment.

ESG Case Study: How corporate purpose strengthens Kellogg’s ESG communications with stakeholders

Read the full story from Thomson Reuters.

Multinational food manufacturing giant the Kellogg Company (Kellogg’s) is among those companies that consistently link their global purpose platform to their sustainability agenda and ensures their purpose is centered on the well-being of their employees and other stakeholders. More specifically, the company, through its Kellogg’s™ Better Days Promise, aims to advance sustainable and equitable access to food by addressing the intersection of well-being, hunger, sustainability, and equity, diversity & inclusion to create better days for 3 billion people by the end of 2030.

2023 Net Zero Report: Decarbonization Momentum Falters with Corporate Implementation Challenges

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The collective experience of the 505 organizational leaders in our 2023 Net Zero Report drills down on the most significant implementation barriers organizations are facing, and the approaches they are taking to overcome these challenges. We find that now more than ever it is vital for organizations to double-down on their decarbonization investments and to use the levers at their disposal to accelerate their impact.

3p’s Crystal Ball for 2023: The ESG trends we see for the coming year

Read the full story at Triple Pundit.

This list may be force us to eat crow (or a plant-based alternative) at the end of the year, but based on what we saw in 2022, and some of the chatter going on in the present —not to mention the macroeconomic trends that will surely affect the world of ESG — we’ve got a list of six trends that will likely define ESG during the coming year.

Global study on ESG incentives in executive compensation

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WTW’s research found that 77% of major companies across North America and Europe include ESG metrics in their executive incentive plans, an increase from 69% last year.

ESG debate escalates as GOP goes after influencers

Read the full story at Banking Dive.

As the new year begins, it’s natural to look at the environmental, social and governance policy debate and anticipate how the players would escalate their arguments. 

Last year, 19 Republican attorneys general wrote perennial ESG punching bag BlackRock with concerns over the asset manager’s strategy. 

Several of the same AGs, two months later, launched investigations into whether the nation’s six largest banks, through their ESG practices, were blocking credit to oil companies.

A handful of states — West VirginiaTexas and Kentucky come to mind — have either barred financial institutions they deem hostile toward fossil fuels from accessing new state contracts — or have asked state pension funds to divest their holdings from such companies.

Webinar: ESG: Value Chain Considerations & Expectations

Jan 24, 2023, noon-1 pm CST
Register here.

Deconstructing your company’s ESG Goals to identify key performance indicators and setting milestones can be difficult. It requires the assistance of multiple stakeholders and departments to fully understand the problem, propose goals, and monitor progress towards them. Adding another layer of complexity is coordinating with stakeholders from outside of your organization, especially in the value chain. 

Join ISN, the global leader in contractor and supplier management, to hear the importance of tracking ESG metrics throughout the value chain, how to leverage technology to track progress and best practices on integrating ESG expectations across the organization. 

Learning Objectives: 

  • Understand the importance of tracking ESG metrics throughout the value chain
  • Identify potential obstacles and how to overcome them
  • Hear what best-in-class organizations expect from their contracts and suppliers 
  • Learn how truly sustainable businesses account for all three components of ESG and include metrics for data tracking in each

Moderator: 

  • John Davies, Senior VP, Senior Analyst, GreenBiz Group

Speakers: 

  • Jenny Buckley, Senior Vice President, ISN
  • Joe Schloesser, Vice President, ISN
  • Ryan Rodriguez, Senior Group Supervisor, ISN 
  • Walter Haug, Senior ESG Specialist, ISN

If you can’t tune in live, please register and GreenBiz will email you a link to access the webcast recording and resources, available to you on-demand after the live webcast.

Nature in the balance: What companies can do to restore natural capital

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Specific corporate actions, many with a positive return on investment, could help reverse the trend of the depletion of natural capital.