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Introduction to Part 1: Navigating the ESG Horizon

Welcome to the inaugural segment of our series, “Beyond Profits: The Power and Purpose of ESG in Today’s Business Landscape.” In this dynamic exploration, we embark on a journey to decode the profound influence of Environmental, Social, and Governance (ESG) considerations in the contemporary business milieu.

Part 1 serves as the gateway to understanding the core of ESG and its pivotal role in shaping the future of businesses. As we traverse through this series, our aim is to unravel the intricate layers of ESG, transcending the conventional profit-centric paradigm. Join us as we unravel the symbiotic relationship between sustainable business practices and enduring success.

This series unfolds against the backdrop of a shifting business landscape where societal and environmental responsibilities are integral to corporate strategies. Part 1 sets the stage, offering insights into the foundational principles of ESG and laying the groundwork for subsequent discussions on how businesses can harness the power and purpose embedded in ESG to thrive in the modern business landscape. Join us as we navigate the ESG horizon, where purpose-driven practices redefine the narrative of business success.

Evolution of ESG

The origin of Environmental, Social, and Governance (ESG) principles and the broader ESG movement can be traced back to a confluence of historical events, societal shifts, and growing awareness of the interplay between business practices and broader social and environmental concerns.

In the mid-20th century, the modern environmental movement began to gain momentum, largely in response to mounting concerns about pollution, deforestation, and resource depletion. Influential works like Rachel Carson’s “Silent Spring” in 1962 raised alarm bells about the adverse environmental impacts of industrialization and the need for sustainable practices. Simultaneously, the concept of Corporate Social Responsibility (CSR) began to emerge, emphasizing the importance of business actions ‘Beyond Profits.

International agreements and conventions reinforced the importance of human rights, environmental protection, and sustainable development. The United Nations Universal Declaration of Human Rights in 1948 and the Earth Summit in Rio de Janeiro in 1992 exemplified the global commitment to addressing pressing societal and environmental challenges.

The emergence of institutional investors with significant influence in the financial markets in the 1980s and 1990s further catalyzed the ESG movement. Institutional investors, including pension funds and endowments, began considering ethical and social criteria in their investment decisions. This gave rise to socially responsible investing (SRI) strategies that aimed to align investments with values and ethical principles.

Formal frameworks for reporting on environmental, social, and governance performance began to take shape with the establishment of the Global Reporting Initiative (GRI) in 1997. GRI developed a comprehensive framework for organizations to report on their sustainability efforts, facilitating transparency and accountability.

In the early 2000s, ESG investing gained prominence as investors recognized the potential impact of ESG factors on financial performance and risk management. This marked the evolution from SRI to a more integrated approach to investment decision-making, with ESG factors increasingly considered alongside traditional financial metrics.

As ESG principles continue to evolve, they remain central to addressing pressing global challenges, such as climate change, social inequality, and corporate governance. The origin of ESG can be seen as a response to the growing recognition of the interconnectedness between business practices, societal well-being, and environmental sustainability. Today, ESG considerations are fundamental to the strategies of businesses, investors, and policymakers worldwide.

The Three Pillars of ESG

Environmental Responsibility:

The “E” in ESG represents environmental responsibility—an acknowledgment of our planet’s fragility and the pressing need to protect it. Climate change, resource scarcity, and pollution are global crises that demand immediate attention. Businesses, recognizing their role in these challenges, are reevaluating their environmental impact. They’re investing in sustainable practices, reducing emissions, and adopting circular economy models. By embracing renewable energy sources, minimizing waste, and implementing eco-friendly supply chains, companies are taking proactive steps to mitigate their carbon footprint. In doing so, they’re not only safeguarding the planet but also future proofing their operations in a world increasingly focused on sustainability.

Infographic: Three Pillars of ESG

Source: https://www.burohappold.com/news/esg-and-why-is-it-important/

What are SASB Standards?

Globally, companies are striving to increase transparency in their ESG & sustainability disclosures and provide insight into their compliance with the Paris Agreement.

Investors as well are gravitating towards sustainability & ESG focused companies and seek actionable information about the sustainability measures taken by them. Thus, sustainability disclosures are now essential to company’s operational and financial performance.

To facilitate companies in generating reliable, transparent performance, the Sustainability Accounting Standards Board (SASB) provides data standards and reporting frameworks as a step toward resolving the sustainability reporting issue.

Founded in 2011, SASB (www.sasb.org) is one of the most used frameworks and standard setting agencies followed by Global Reporting Initiative (GRI) Standards and Task Force on Climate-Related Financial Disclosures (TCFD) Recommendations.

Currently, it is managed by the Value Reporting Foundation (VRF). SASB develops and publishes accounting standards for financially material sustainability issues. These standards are sector-specific and created for investors who require sustainability related information that impacts a company’s valuation.

The concept of sustainable investment is becoming increasingly popular among investors. By harmonizing reporting standards, SASB is not only able to address the proliferation of disclosure frameworks, but also to provide more consistent comparisons between sustainable investments.

These standards enable businesses to report on impacts on the environment, social capital, human capital, business model, innovation, and leadership and governance from a financially material point of view. Over 1300 companies worldwide use SASB standards to report on all three ESG pillars.

IFRS Sustainability Disclosure Standards

The International Sustainability Standards Board (ISSB) was established by the IFRS Foundation to address the fragmented landscape of voluntary, sustainability-related standards and requirements that add costs, complexity, and risk to companies and investors. The mission of the ISSB is to develop and issue comprehensive sustainability reporting standards that are consistent, comparable, and high-quality, designed to meet investor needs. The ISSB published its first two sustainability reporting standards on 26 June 2023, which are as follows:

General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1)

Under IFRS S1, entities must disclose sustainability-related risks and opportunities that are useful to primary users of general purpose financial reporting when making decisions to provide resources to the entity.

 Climate-related Disclosures (IFRS S2)

This is the first thematic standard that mandates entities to disclose information about climate-related risks and opportunities that may affect its prospects over the short, medium, and long term. This objective can be achieved by referring to and considering industry-based disclosure topics in IFRS S2 and considering their applicability.

The IFRS Sustainability Disclosure Standards are based on the TCFD framework’s four pillars: governance, strategy, risk management, and metrics and targets.

Net Zero Commitments

Climate issue isn’t merely a checkbox exercise or a public relations campaign—it’s a transformational journey, embodying the essence of ‘Beyond Profits.’ The rise of ESG-focused funds, green bonds, and impact investing reflects a profound shift in the investment landscape, aligning with the Net Zero coalition. As per the Paris Agreement, carbon emissions must be reduced by 45% by 2030 and reach net zero by 2050 (India by 2070). Under the agreement, each participating country is required to submit its own climate action plan known as a Nationally Determined Contribution (NDC). These NDCs outline the country’s emissions reduction targets and the actions it intends to take to achieve them. Countries are encouraged to enhance their NDCs over time.

As per the latest report of United Nations’ Intergovernmental Panel on Climate Change (IPCC), limiting global warming to 1.5C or 2C would mean “rapid and deep” emissions reductions in “all sectors” of the global economy.

Many national governments, local governments, and business leaders are committed to reach net-zero emissions. Over 90 countries, including China, the United States, and India, have set net-zero targets. Additionally, numerous regions, cities, and companies have their own targets. The top seven emitters, which include China, the United States, and India, contribute to about half of global greenhouse gas emissions. About 75% of the world’s greenhouse gas emissions come from the Group of 20 (Argentina, Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, and the European Union), according to the UNEP Emissions Gap Report 2022.

However, a few “carbon sink” nations (Bhutan, Comoros, Gabon, Guyana, Madagascar, Niue, Panama, and Suriname) already have their emissions under control.

Conclusion

As the first part of this series, our goal has been to illuminate, inspire, and foster a deeper understanding of the Beyond Profits ESG. As we step forward with the knowledge acquired from this series, consider it a catalyst for the next one where we would be discussing the Social aspect of ESG. Watch this space for the next part of the series.