ESG

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Chapter 2 - Society


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Welcome to the Environmental, Social, and (corporate) Governance page

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ESG

In 2004, the term "ESG" was officially introduced with the publication of the UN Global Compact Initiative's Who Cares Wins report. ESG is another way to measure the age-old concept of socially responsible investing. The UN report defined the three main pillars of ethical finance: environmental, social and governance (ESG). These new metrics responded to investors' desire to see good financial returns on their investments and improvements in social outcomes.

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Environmental, social, and corporate governance (ESG) is an approach to evaluating the extent to which a corporation works on behalf of social goals that go beyond the role of a corporation to maximize profits on behalf of the corporation's shareholders. Typically, the social goals advocated within an ESG perspective include working to achieve a certain set of environmental goals, as well as a set of goals having to do with supporting certain social movements, and a third set of goals having to do with whether the corporation is governed in a way that is consistent with the goals of the diversity, equity, and inclusion movement.

Environmental concerns

  • Climate crisis
  • Environmental sustainability

Social concerns

  • Diversity
  • Human rights
  • Consumer protection

Corporate governance concerns

  • Management structure
  • Employee relations
    • Responsible investment

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ESG History

The roots of today's ESG (Environmental, Social, Governance) standards trace back to a pivotal moment in 2000! That year, UN Secretary General Kofi Annan launched the UN Global Compact, establishing the first 9 groundbreaking principles that have since shaped the landscape of responsible business. The 10th was added in 2004.

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The Four Pillars Behind the 10 Principles are:

  • ๐—›๐˜‚๐—บ๐—ฎ๐—ป ๐—ฅ๐—ถ๐—ด๐—ต๐˜๐˜€: Derived from the Universal Declaration of Human Rights (1948)
  • ๐—Ÿ๐—ฎ๐—ฏ๐—ผ๐˜‚๐—ฟ: Grounded in the International Labour Organizationโ€™s Declaration on Fundamental Principles and Rights at Work (1919)
  • ๐—˜๐—ป๐˜ƒ๐—ถ๐—ฟ๐—ผ๐—ป๐—บ๐—ฒ๐—ป๐˜: Based on the Rio Declaration on Environment and Development (1992)
  • ๐—”๐—ป๐˜๐—ถ-๐—–๐—ผ๐—ฟ๐—ฟ๐˜‚๐—ฝ๐˜๐—ถ๐—ผ๐—ป: The 10th Principle was included after establishing the United Nations Convention Against Corruption (2004)

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Human Rights

Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; and

Principle 2: make sure that they are not complicit in human rights abuses.

Labour

Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining;

Principle 4: the elimination of all forms of forced and compulsory labour;

Principle 5: the effective abolition of child labour; and

Principle 6: the elimination of discrimination in respect of employment and occupation.

Environment

Principle 7: Businesses should support a precautionary approach to environmental challenges;

Principle 8: undertake initiatives to promote greater environmental responsibility; and

Principle 9: encourage the development and diffusion of environmentally friendly technologies.

Anti-Corruption

Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery.

Content source
UN Global Compact
https://unglobalcompact.org/what-is-gc/mission/principles

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ESG in fiancial terms

What Is Environmental, Social, and Governance (ESG) Investing?

Environmental, social, and governance (ESG) investing refers to a set of standards for a companyโ€™s behavior used by socially conscious investors to screen potential investments.

Environmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change for example. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a companyโ€™s leadership, executive pay, audits, internal controls, and shareholder rights.

ESG Criteria (exemples)

The criteria are set by analysts who identify the relevant issues facing specific sectors, industries, and companies.

  • Companies that operate in higher-risk areas or have exposure to coal or hard rock mining, nuclear or coal power, private prisons, agricultural biotechnology, tobacco, tar sands, or weapons and firearms.
  • Companies involved in major or recent controversies over human rights, animal welfare, environmental concerns, governance issues, or product safety.
Environment
  • Publishes a carbon or sustainability report
  • Limits harmful pollutants and chemicals
  • Seeks to lower greenhouse gas emissions and CO2 footprint
  • Uses renewable energy sources
  • Reduces waste
Social
  • Operates an ethical supply chains
  • Avoids overseas labor that may have questionable workplace safety or employ child labor
  • Supports LGBTQ+ rights and encourages all forms of diversity
  • Has policies to protect against sexual misconduct
  • Pays fair (living) wages
Governance
  • Embraces diversity on board of directors
  • Embraces corporate transparency
  • Someone other than the CEO is chair of the board
  • Staggers board elections

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Deep dive

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"Non-technical standards, such as the ESRS and ISSB Standards, are more about finding common ground, not competition."
Content source
Andreas Rasche - esteemed Professor at the Centre for Sustainability at Copenhagen Business School

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An ESG strategy

ESG framework

Contrary to what many believe, (E)nvionmental - (S)ocial & (G)overnance is not about strategy. It is simply the FRAMEWORK within which you can shape your future strategy. Drawing up a correct CSRD report is not a strategy, but you can build a strategy on it.

Until recently, financial reporting focused on only one player: your own company. The strategy could, therefore, easily become shareholder-driven.

The shareholder's story was about 'reinforcing loops': turnover ... more turnover, margin ... more margin, ...

Due to the financial and climate crises, this has changed: attention is paid to all stakeholders. In concrete terms, you have to look over the wall. And that creates relationships. Better yet, it makes the relationships that were already there important, valuable, and bidirectional.

In the stakeholder story, what used to apply only to marketing becomes reality: How do I create value for my customers, how do I bind them to my company, etc.? This applies not only to customers but to all stakeholders.

Goal-oriented action is always a 'balancing loop', a bi-directional relationship

In summary, it is about the change from "I to we thinking" in economic terms, and where systems thinking comes into play. As more relationships are involved, the situation evolves more complex.

Unfortunately, this discipline is still rarely taught in the MBA program. "We live in a VUCA world" is a frequently heard cry that sows some fog about reality. We live in a relationshipโ€”and context-driven world that forms patterns. In terms of patterns, think for example, of the ecosystems between companies increasingly appearing in the markets. When we can no longer describe the existing patterns, we suddenly call it 'the system'.

ESG is the combination of ecological, social and societal patterns that arise from humanity's will to survive as humanity: "The common ground, not the competition". It's easy, just a different way of thinking.

A Strategic ESG perspective

  • what is the direction you want to take your company (given the context)
  • and what is the next step you can take?

The answers to these last two questions shape your future strategy.

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