Whiplash Team, 23rd September 2022
ESG criteria and their importance for companies
In our previous post, we highlighted why sustainability is a fundamental element of the success and growth of companies. Amongst them, is access to financing. In this sense, one of the essential points to attract investment is to incorporate ESG criteria into the business strategy.
The acronym ESG refers to the Environmental, Social and Governance criteria that define a company as sustainable.
The acronym was coined in the early 2000s and is the result of the evolution of what was known as Socially Responsible Investing. However, the ESG criteria go further, and comprehensively include all the company’s processes, with the idea of determining what is their real impact, beyond the business itself.
What do the ESG criteria measure?
Environmental factors. Within an ESG strategy, they are the measures that have a positive impact on the environment. These include those aimed at reducing greenhouse gas emissions; those actions aimed at reducing waste and pollution, as well as the reconversion of the energy matrix, from fossil fuels to clean energy.
Social factors. They mainly include actions related to working conditions and respect for Human Rights. Also, the creation of a diverse and inclusive work environment and the management of the relationship with the communities where the organization operates.
Governance factors. They refer to those that define good corporate governance. I.e., its processes, its culture and its values. They range from compensation systems, through internal transparency policies and the fight against unethical practices, to financing strategies.
Sustainable investment
Therefore, the ESG criteria have become an essential reference for investors when selecting those projects they decide to bet on. This type of investment is known as “Sustainable Investment” or “Responsible Investment” and its objective is to encourage companies to improve the conditions of their environment.
Although sustainable investment is not a new trend, in recent years it has become more relevant. This investment model classifies companies based on how well their sustainability strategies fit into ESG criteria and whether they truly have an impact on society.
To do this, the United Nations (UN) Sustainable Development Goals are the main reference to know if a business strategy falls within the ESG criteria or not.
On the other hand, the PRI, an initiative of investors in association with the UNEP financial initiative and the UN Global Pact, with more than 4,000 signatories in more than 60 countries, provides a guiding framework for investors in their “search for long-term value”.
This initiative is summarized in six Principles for Responsible Investment in which ESG issues play a leading role. The goal is to build a “sustainable and economically efficient global financial system that both responsible investors and beneficiaries need”.
In this context, companies that develop business strategies that meet ESG criteria undoubtedly have a greater chance of receiving both institutional and private funding.
