What are the criteria of ESG – and why is it important?

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ESG (a set of environmental, social, and governance standards) is becoming increasingly prioritized by modern businesses. Financial advisers are discovering that much of their client base wants their bonds to focus on ESG factors. Per Aviva Investors, more than 40 per cent of advisers are seeing an increase in demands for these bonds, and the trend has been noticeable elsewhere too. 

To achieve the effective ESG strategy that consumers desire now, there are certain criteria that companies have to meet. But what are these criteria?

Environmental

Environmental criteria relate to the welfare of the planet and its species – companies will be asking themselves: how will our operations and actions harm the planet in some measurable way? More specifically, environmental criteria can mean issues such as carbon emissions, renewable energies, biodiversity, conservation, and overall sustainability. 

Social

Social criteria are concerned with human rights, and how a company treats people – be it its staff or the communities it operates in. Consumers want to see that a company is having a beneficial influence on its human surroundings. These influences can extend to work conditions, wages, maternity leave rights, equal pay across genders, and then also charitable support to the local area.

Governance

Governance criteria deal with the internal leadership processes within a company. So at the board level, governance looks at the leadership: is it diverse? How are decisions made? What controls do decisions go through? Aside from the board level, governance will also consider compliance, transparency, and strategic planning. 

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Why is ESG important?

Companies are pivoting to integrating these three areas and making them a key part of the values of their business. The general public is concerned with ESG values being upheld – if a company can show that ESG is important to them then there are many benefits. Strong, outward ESG manifests itself in positive brand awareness, increased engagement with consumers and suppliers, higher-quality applications for vacancies, as well as efficiency across the business. 

As a result, investors are increasingly checking to make sure that a prospective company has a strong ESG policy. It can be difficult to accurately measure ESG performance, but the companies that are most convincing can consequently expect increased investment. With so much capital at stake, therefore, ESG has become a lucrative business. 

Overall, ESG investment is being driven by consumer and investor demands. With its growing importance, regulation will soon follow. Authorities will be keen to ensure that in a competitive, global landscape, ESG policy is transparent and fairly judged. As a result, it’s more important than ever that companies invest in rigorous ESG that goes further than consumer demands.