ESG is a measure of the impact that companies have on the environment and society.
ESG – short for environmental, social and sovernance – refers to a set of standards that measure the impact businesses have on the environment and society and how transparent and accountable they are. An ESG strategy is intended to be good for society as a whole but may also have benefits for recruitment because of an increasing interest in the impact of companies among workers.
History of ESG
The modern concept of ESG took shape in the mid-2000s, although the principles behind it are decades, and maybe centuries, old. Throughout the 20th century there were many campaigns pressuring companies into fairer, more sustainable business practices, such as efforts to stop the exploitation of workers or the introduction of corporate governance codes.
But it was the 2004 United Nations report Who Dares Wins that carried what is widely considered to be the first mainstream mention of ESG in the modern context. The report encouraged all business stakeholders to embrace ESG and this coincided with increased attention on issues such as sustainability, respect and diversity in the workplace.
Recent trends in ESG
In the two decades since Who Dares Wins was published, governments around the world have updated their laws to emphasise ESG. In the UK, for example, the Government passed the Companies Act (2006) to set the stand for the “G” category.
Environmental laws have been passed across the globe, fuelled by the urgency of the climate crisis, the UN’s focus on sustainability and summits like COP26. The “S” category has also been boosted by new laws criminalising discrimination and encouraging diversity.
In recent times efforts to derail ESG have grown, with the US the centre of ESG opposition.
Critics have called it “woke” capitalism that doesn’t allow businesses to reach their full potential.
Advantages of ESG
ESG can have huge benefits for companies in areas such as brand loyalty and cost reduction. Recent studies also suggest it may have significant recruitment benefits because candidates prefer to work for businesses that have a positive societal impact. Research by US professional services firm Marsh McLennan, for example found that the impact of ESG performance on workforce sentiment can be a source of competitive advantage.
It found that those companies with highly satisfied employees tended to have a better ESG performance than the global average. The findings also suggest that ESG performance will become increasingly important to attracting and retaining talent as Millennials and Gen Z make of an increase proportion of the workforce.
Disadvantages of ESG
Even though stakeholders worldwide have welcomed ESG, it still has no uniform reporting standards. Companies and investors measure different things and report in different ways. Any solution will take a long time because global markets will have to standardise their reporting and metrics. The biggest recent stride has been the EU’s Sustainable Finance Disclosure Regulations, a 2019 measure to bring some order to the sustainable investing market.
Use case
Total, which has for years been synonymous with the oil and gas industry, has rebranded as TotalEnergies to reflect its transformation into a broad energy company playing a significant role in the energy transition. It’s assessed on its ESG performance by ESG rating agencies and is included in various ESG indices. Since 2001 it has been present on the FTSE4Good index and was reintegrated into the DJSI World and DJSI Europe Indices in 2022.
Its website makes clear its commitment to sustainability, including both the environment and the wellbeing of its people.