First used in 2005 in the UN Global Compact's “Who Cares Wins: Connecting Financial Markets to a Changing World” report, the acronym ESG has spread widely in the national and international investment market. Today, the term is already used as a checkmark for business. Shareholders and investors are gradually prioritizing companies that adopt more sustainable principles in relation to the environment, society and corporate administration.
ESG stands for Environmental (E), Social (S) and Corporate Governance (G). In general terms, the term ESG refers to an analysis metric that assesses the practices of the business sector beyond economic and financial matters, with a deeper look at socio-environmental and organizational agendas.
It is precisely the combination of these factors that indicates which companies are more engaged with the new global sustainability demands and, as a result, are more likely to result in good business and positively impact the planet. “The ESG modality adds to traditional investments the interest in mitigating environmental, social and governance risks caused by the investee's performance with the expectation of greater financial return and value addition”, explains the Institute of Corporate Citizenship (ICE, in Portuguese).
Companies such as Morgan Stanley Capital International (MSCI), one of the most recognized in the financial market, are dedicated to verifying the internal and external practices of companies related to ESG principles. Based on this analysis, MSCI ranks institutions as “Laggards”, still far from ESG practices, “Average” and “Leaders”, highly committed to the environment, society and governance, as shown in the XP Investimentos infographic:
After all, what are ESG practices?
A company approaches a “Leader” rating in ESG when it develops and introduces more sustainable, inclusive and equitable actions into its corporate practices. According to XP Investimentos, some of these practices are:
Environmental: reduction of net emissions of greenhouse gases (GHGs); preservation of biodiversity; sustainable financing and responsible management of natural resources; investment in renewable energy; among others.
Social: fair and inviolable working conditions; individual and collective protection of employees; product safety and quality standards; investment in human capital; access to nutrition and health; among others.
Corporate Governance: ethics and transparency in business; audits and equity controls; corporate diversity from the board to the workforce; adoption of actions against corruption; among others.
Why adopt ESG practices?
ESG investments are already characterized as an important change for the business sector. Companies that are not dedicated to adapting their practices and adopting ESG principles in the coming years have great chances of “falling behind in business”. Check out other reasons to mobilize for the environment, society and corporate governance:
Strengthens the Net Zero movement
When companies mobilize to adopt ESG practices, especially focused on environmental and GHG emissions reduction matters, the result is a direct impact on maintaining the increase in global temperature below 1.5°C.
More revenue, less costs
Companies that adopt ESG practices are better prepared to meet the policies and requirements that are being practiced around the world. With more responsible businesses and more valued employees the business will increasingly attract more interest from investors.
Productivity and demand on the rise
It is not just the investment sector that has its eye on companies aligned with the ESG principles. More and more informed and demanding consumers have prefered products and services that adopt sustainable practices.
Solidity for investors
The Net Zero Asset Managers initiative already represents 1/3 of ESG investments worldwide. Currently with 87 signatories, including Brazilians, the group of managers is proof that the adoption of sustainable practices has great prominence in the business sector.