Demystifying ESG: What's it all about?

You can’t escape the latest must-know acronym: ESG. It permeates the news we read, echoes through the voices of our senior leadership, and even shapes our work. Despite the constant exposure, many are left wondering what it really means, where it came from, and what they should do about it.

A brief history

ESG stands for Environment, Social and Governance. It’s a financial term, introduced by the lending community to capture the long list of legacy and emerging investment risks that are relevant to borrowers and sponsors of projects and businesses. These risks, though not all that new, have undergone a bit of a rebranding.

Think of it as sustainable development, as growth that can be sustained, meeting the needs of the present without compromising the ability of future generations to meet their own needs. This widely accepted definition of sustainable development was introduced to us in the late 1980s through the World Commission on Environment and Development’s Brundtland report, which laid the groundwork for the first Earth Summit in Rio de Janeiro in 1992.

As compelling as it was, the global community of business leaders and advisors struggled with operationalizing sustainable development. It just didn’t readily translate from conference declarations and boardrooms to projects and boots on the ground. As a result, little progress was made on the global environmental and social agenda until the early 2000's.

The real catalyst for change was the gradual acceptance and recognition that we can't afford not to address potentially catastrophic environmental and social issues. They pose a threat to the very foundation of our global financial systems and insurance markets. The push to do the right thing—corporate social responsibility—evolved into a new compliance regime, established by banks, pension funds, insurers, and the equity markets.

Global momentum

The financial community recognized that global sustainability issues like climate change, resource depletion, food insecurity and human rights, individually and collectively, had the potential to introduce a new order of financial turmoil. They also recognized that strong environmental and social performance was a proxy for good governance—a sign of a well-run and forward-thinking business.

The lending community introduced a host of ESG standards and reporting frameworks, some tailored to specific industries. These frameworks identify targets and metrics for hundreds of priority risks and impacts. As evidence of the value placed by the financial markets on robust environmental and social performance, the UN-backed Principles for Responsible Investment now boasts over 1,600 members, collectively representing over USD$70 trillion of assets under management.

The 2015 introduction by the United Nations of 17 Sustainable Development Goals (SDGs) further advanced the cause, further framing ESG and sustainable development into a set a distinct global imperatives and goals:

1. No poverty
2. Zero hunger
3. Good health and well-being
4. Quality education
5. Gender equality
6. Clean water and sanitation
7. Affordable and clean energy
8. Decent work and economic growth
9. Industry, innovation and infrastructure
10. Reduced inequalities
11. Sustainable cities and communities
12. Responsible consumption and production
13. Climate action
14. Life below water
15. Life on land
16. Peace, justice and strong institutions
17. Partnerships for the goals

The SDGs provided a common rallying point, serving as the foundation for further global agreements, and guiding the development of a plethora of national environmental and social policies and regulations.

ESG today

Today, the ESG needle has well and truly moved. Governments and markets that long agonized over the costs and logistics associated with addressing these global issues now understand that the cost of doing nothing, or not enough, will be far greater.

The financial community’s interest in ESG has certainly accelerated the pace of action on environmental and social issues. However, truly sustainable development, characterized by responsible growth within the limits of the biosphere (and not subject to the whims of the financial markets), will ultimately be achieved by the likes of us: community and corporate leaders. Where governments have historically failed to negotiate meaningful action on issues of global importance, corporations with a moral compass, along with sovereign and multilateral development banks, are finding ways to work across borders and cultures to get things done.

Many industries, like oil & gas, mining, and agriculture, have been contemplating ESG issues since long before Brundtland even coined the term ‘Sustainable Development’. The big difference now is that there are more issues, impacts and risks to consider. There is also a much greater demand for transparency, progress and tangible, verifiable improvements in the health and protection of the planet and its inhabitants.

While the prominence of and demand for ESG has skyrocketed, many businesses are struggling to keep up. The “bite sized solutions” and imperatives are many, and constantly evolving. With hundreds of potential topics and metrics, along with a plethora of reporting frameworks, standards and guidelines, it is challenging to know what to work on and what should take priority. There is no more room for greenwashing anymore. In today’s world, audiences are sophisticated, and facts can be checked quickly and easily. Information that enters the public domain is forever, emphasizing the importance of ensuring that ESG and sustainability data gathered for reporting and decision-making is appropriate, complete, and defensible.

Because of these new demands, the responsibility bar for businesses is as high now as it has ever been. Merely adhering to legal compliance is no longer enough. Now, there is an expectation for businesses to lead by example, stay ahead of their peers, and proactively address emerging issues. This holds particular significance in dealings with government and large corporations, where adherence to specific ESG criteria can be the difference between winning or losing work. You now need to know the answer to questions relating to your energy transition plans, your circularity strategy, your greenhouse gas footprint, and your policy on human rights and modern slavery. While this may sound daunting, staying ahead of the curve with a proactive ESG approach is surprisingly straightforward.

Where to start

Whether you are just starting to think about your ESG strategy, or you are already well along the way, a prudent step for any company is to undertake an ESG Materiality Assessment. This assessment looks critically and deeply at your business activities to identify the impacts that you have on the environment and society, and at the same time identifies and classifies the impacts that the demands and requirements of the environment and society do and will have on your business. It’s an important foundation for your risk management strategy, and it is the best way to thoroughly identify and prioritize those ESG risks that matter most to your operations. Like any part of your business, you always want to put resources where they add the most value, and a Materiality Assessment can help achieve this for ESG related issues. An ESG Materiality Assessment can apply at any scale: a project site, a small business or a multi-national company. The risks (and opportunities) might look different, and the effort to figure things out will vary, but the overall approach is transferable and will set you up for long term success in meeting the demands of clients, stakeholders, and the health of our planet.