Sustainability is no longer a new topic for organizations, the concern with environmental issues has become part of the business strategy, considering that consumers and legislation are very attentive to this issue.
Over the last few decades, other equally important issues have been incorporated into the corporate world, such as social responsibility and corporate governance. And more recently, organizations have started to review their policies on gender, diversity, inclusion, respect for employees, attention to suppliers, compliance with legislation and fair competition. Soon, several publications and studies started to present these values represented by a broad vision, which started to integrate environmental, social and governance issues (ESG, from English, environmental, social and corporate governance).
1. What is ESG and how it can impact your business
Society has given increasing importance to environmental and social issues, changing the dynamics of choosing companies, products and now also investments. Associated with this new behavior are the so-called ESG, which are criteria and indicators that take into account environmental, social and governance principles.
The acronym ESG comes from the English term Environmental, Social and Governance – or, in Portuguese, ASG, referring to Environmental, Social and Governance. In the investment world, ESG investment is one that incorporates environmental, social and governance issues as criteria in the analysis, going beyond traditional economic-financial metrics and, therefore, allowing a holistic assessment of companies.
The introduction of ESG criteria in investment decisions can be understood as a broadening of the focus on shareholders (shareholders) to all stakeholders (interested parties). As a result, investment and credit granting decisions take into account their impact on all stakeholders – such as employees, consumers, suppliers and the community – and not just the potential profit for the financial institution and its shareholders.
Although discussions about ESG principles have recently gained notoriety in Brazil, when we look around the world, it is evident that consideration of ESG factors is not from today and, more importantly, that it is not a passing trend, but rather a new reality.
Globally, more than $30 trillion in assets under management (AuM) are managed by funds that have defined sustainable strategies. This represents a 34% increase over 2016, according to the Global Sustainable Investment Alliance.
From the point of view of companies, there is no doubt that there is still a lot to be done so that long-term results in terms of sustainability are achieved. However, on the positive side, we see that the growing focus on environmental, social and governance issues by investors, as well as society in general, has already had an effect on companies’ behavior, either because they are in fact aligned with the ESG principles or simply because they recognize that to attract capital this is an increasingly essential factor.
2. Why should a company consider ESG principles?
More engaged consumers
The first factor that must be taken into account is the engagement of consumers with companies that invest in environmental conservation and are socially responsible.
According to Dr. in Environmental Management, Gildo Balliana, Grupo Index consultant: Organizations are beginning to understand that just making a profit is no longer enough, paradoxically, profitability no longer guarantees the company’s future. Recent surveys show that people, especially the younger generation, tend to spend more on products and services that are known to be sustainable. This trend is irreversible and has been affecting markets around the world. They are conscientious consumers looking for reliable companies; attentive to good environmental practices, socially responsible and adopting firm corporate governance attitudes.
In a recent study, XP Investimentos detected that 79% of Generation X consumers (born in the 70s and 80s) take into account the concern with the environment when choosing products and brands. Looking at Generation Y, this percentage rises to 85%. In other words, both in choosing their products and in investments, almost half of the population considers ESG factors as fundamental.
More demanding investors
Another factor that must be considered by companies when incorporating the ESG is investors, who have looked at these companies differently. One example is the commitment of the Sovereign Fund of Norway, announced earlier this year, to divest about US$13 billion in assets related to the use of fossil fuels. Another example is BlackRock, the world’s largest asset manager, with US$7 trillion in assets under management – in other words, 4x Brazil’s GDP! There, sustainability is a central part of the investment strategy, with 100% integration of ESG criteria.
It is important to highlight that the investors’ preference for companies that follow the ESG principles is not only due to concerns about the environment and the social, companies continue to be corporations that must aim for profit. However, a company that takes into account the ESG principles are more resilient, resist more efficiently in times of crisis and are better prepared for change. As can be seen in the graph below, which demonstrates how the Bovespa and ISE (Environmental Sustainability Index) indices have evolved since its creation in 2006.
More competitive world market
The Global Compact recently published a study on how the pandemic impacts the 2030 Agenda and the achievement of the Sustainable Development Goals (SDGs). In the present study, it is evident that Brazil needs a resumption of its environmental, social and anti-corruption protection network. International markets require certain standards of business behavior to keep businesses active. This implies a loss of competitive advantages for countries that do not respect these new paradigms.
Thus, national companies need to be involved in issues such as the SDGs and the business impacts arising from these new concerns.
Observing the table below, the corporate opportunities that may translate actions into results can be seen; attitudes towards sustainable and perennial profitability.
Finally, companies that care about ESG are less subject to serious environmental accidents, have a better relationship with the communities around them, have better trained employees, succumb less to corruption, better meet the expectations of their consumers, its investors and, consequently, are more in tune with the market.
3. How a company can adopt ESG principles
When analyzing only economic indices, there are already several tools that can assess whether a company is profitable or not, following accounting standards. However, how to assess whether a company really takes into account environmental and social aspects in its day-to-day?
There are a number of methodologies for determining the rating, a term used to define an assessment score for ESG principles. One of the methodologies used is called the Materiality Matrix. This matrix takes into account the following points in the ESG assessment.
[infogram id=”1pe36n536gmk7pfmp7z5gnjm2yal975zqlj”]
The Index Group has developed its own methodology based on the Materiality Matrix, where companies that carry out the ESG Audit will receive indices for each of the above principles. In addition, the Gaps are provided, that is, the points where the company must improve in order to evolve in its ESG index. The list of all gaps forms the RoadMap, which is nothing more than the path that the company should take to reach better ESG indexes.
Together with the RoadMap, Grupo Index makes available a Business Intelligence Report, where the company can monitor the actions it needs to take, as well as monitor what each one of these actions impacts on its indexes.
The chart below better illustrates the goals of the Index Group:
[infogram id=”1pnml7kxvrm16wsz7lp2yz61rvamy3vz33z”]
Interested in this subject? Contact Grupo Index to leverage your company on the ESG principles!
