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Do you know that the term ‘ESG’ was first coined in 2005 in a landmark study entitled “Who Cares Wins” with Ivo Knoepfel as the author? Today, ESG investing is estimated at over $20 trillion in assets under management around the world, and its rapid growth builds on the Socially Responsible Investment (SRI) movement that has been around much longer (Kell, 2021).
This article will be addressing 4 fundamental questions:
1) What is ESG?
2) What are the foundational problems companies need to understand in extracting ESG data?
3) How will ESG improve corporate performance?
4) What are the advantages of integrating ESG into a company's economic decisions?
ESG stands for environmental, social, and governance which is considered as a set of standards for investors to screen potential investments in a company’s operations as illustrated in Figure 1. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights (Team, 2021).
Figure 1: Examples of ESG (WONGTRAKOOL, 2018).
Source: Western Asset
ESG leaders, companies and brands need to address foundational data problems. For instance, volume, velocity and variety (Nakai, 2020), as can be seen from table 1.0
Variety | Velocity | Volume |
ESG data takes many different shapes and forms. A company needs to potentially collect hundreds of datasets from internal and external sources which come in different formats and schemas. | ESG data constantly changes in negative press articles, shifting consumer behaviour, product recalls and extract. Companies can course-correct the data which depends on the speed of analyzing the data. | Analysing data coming from social media and news, leads to the Big Data problem. A company might need to analyse terabytes of data on a daily basis to ensure there is no drift in their ESG performance or consumer perception of their ESG performance. |
Table 1.0 Foundation data problems in ESG (Nakai, 2020).
These foundational data problems lead organisations to seek an accurate understanding of their own ESG metrics, to draw insights and perform in analytics/AI and to enhance operational performance.
It has been proven that ESG is good for investment decisions which improve the company's financial performance. Figure 2 shows nearly half of the organisations indicate a positive relationship between ESG and corporate financial performance, with only 11 per cent finding a negative relationship.
ESG evaluation provides a comprehensive perspective of possible areas of environmental and social risk and opportunity for businesses operating in constantly changing marketplaces. It can assist in identifying areas where the organization is squandering resources so that they can be optimized, as well as areas where key performance indicators (KPIs) can be set up to track procedures or policies that contribute to ESG goals (Hung, C., 2021).
Listed firms that identify and handle ESG risks and opportunities are more likely to outperform those that do not, since they are better prepared to deal with the effects of catastrophic events like harsh weather. They can also better meet new demand, such as that generated by decarbonization.
Working in a workplace with a worthwhile social aim can also be beneficial to employees. This is because, not only can a cultural and social focus in the workplace reduce work-related health problems, but it can also improve employee retention, morale, and productivity (South China Morning Post, 2021).
There are 5 main advantages of integrating ESG into a company's economic decisions:
1. Top-line growth:
By having a strong ESG proposition, it allows companies to better tap into new markets and also expand into the existing ones. In addition, the more sustainable products offered by the company will attract B2B and B2C customers. It can also improve resource access by building stronger community and government relationships.
2. Cost reductions:
ESG can help with offsetting rising operational expenses (such as raw-material costs and the true cost of water or carbon), which according to a McKinsey study can have a 60% impact on operating profitability.
3. Reduced regulatory and legal interventions:
Strong ESG helps companies lower their risk of negative government action across sectors and locations. It may also win the support of the government.
4. Employee productivity uplift:
A strong ESG proposal may help businesses recruit and retain top talent, increase employee motivation by fostering a sense of purpose, and boost overall productivity. Shareholder returns are linked to employee satisfaction.
5. Investment and asset optimization:
By allocating money to more attractive and sustainable alternatives, a strong ESG offer can boost investment returns (for example, renewables, waste reduction, and scrubbers). It can also assist businesses in avoiding stranded investments that may not pay off in the long run due to long-term environmental concerns. (Henisz, W., Koller, T., & Nuttall, R., 2021)
However, many companies, particularly those dealing with pandemic-related economic issues, are concerned about costs. Investors, rating agencies, and other stakeholders have various ESGrelated criteria, and small and mid-sized enterprises without a well-staffed sustainability department may struggle to meet them.
To conclude, investing in ESG is highly recommended to meet Singapore’s corporate and social needs. ESG can be a powerful tool in allowing Singapore companies to make appropriate decisions by incorporating the framework into their business strategies and elevating their future financial performance.
Bibliography
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12) WONGTRAKOOL, B. M. (2018, April 4). ESG Essentials: What You Need to Know About Environmental, Social and Governance Investing. Retrieved from Western Asset: https://www.westernasset.com/au/qe/research/whitepapers/esg-essentials-what-youneed-to-know-2018-04.cfm.
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