Environmental, Social, and Governance (ESG) refers to a company’s environmental consciousness, their interaction with employees and society as a whole, and their corporate governance and behavior. These three categories have seen a significant uptick in consideration in the corporate sphere, namely within business valuations and investor decision making. This recent emphasis placed on ESG means companies stand to benefit from a sense of mindfulness when creating and implementing policies.
This marks the first of an alert series over the next few months to provide you with insight into the importance of ESG consciousness within corporate management, with emphasis being placed on the environmental component. We will also provide tips to help companies strategically position themselves to benefit from this relatively recent shift in focus.
Various metrics, including the highly regarded Morgan Stanley Capital International ESG ratings system, have been created to provide a way of quantifying a business’ level of regard for these three aspects of management. These metrics have since become broadly accepted forms of evaluation for a business’ prospective future success. For example, a business’ current grade within the environmental category would be moderately indicative of how well-prepared the company will handle future environmental risk and, conversely, whether it stands to benefit from successfully leveraging environmental opportunities.
In sum, ESG metrics aim to deliver comprehensive evaluations of a company’s aptitude in each of the three categories or pillars: environmental, social, and governance. Due to the broad-ranging nature of the pillars, a set of critical areas of focus is derived from each in order to provide a more thorough assessment. For instance, the environmental pillar comprises four critical areas: climate change, natural capital, pollution and waste, and environmental opportunities. It’s therefore advantageous for businesses to be well educated on the intricacies contained within these critical areas of focus, as their ESG grades will be dictated by their specific performance.
We look forward to sharing practical tips with the corporate community and delving into each critical area of focus within the environmental pillar in our subsequent ESG alert series.
*The authors were assisted by legal intern and University at Buffalo student Colin M. Jackson.
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