Environmental, Social and Governance (ESG) Management

ESG and SDGs

The United Nations' Sustainable Development Goals (SDGs) and Environmental, Social, and Governance (ESG) are frameworks that are closely related and work together to promote sustainable development.

Explanation

• SDGs

  The SDGs are a set of 17 goals that the UN established in 2015 to achieve sustainable development by 2030. The goals address issues like poverty, climate change, and environmental degradation.

• ESG

  ESG is a framework that companies use to measure, standardize, and implement activities that are aligned with the SDGs. ESG considerations include environmental, social, and governance factors.

How SDGs and ESG are related

• SDGs provide a broad framework for sustainable development, while ESG frameworks are tailored to specific businesses.

• Aligning ESG goals with SDGs can help businesses contribute to global sustainability while also improving their reputation, profitability, and resilience.

• ESG-based investment decisions can create long-term value for businesses and society.

• Incorporating SDGs into business targets can improve environmental performance.

Benefits of aligning ESG goals with SDGs

• Companies can create long-term value

• Companies can improve their reputation, profitability, and resilience

• Companies can contribute to global sustainability

ESG Key Standard

These are framework and tools that help organizations in assessment and report on their environmental, social, and governance (ESG) impact. These standards help companies create sustainable business practices and disclose their non-financial risks and opportunities.

IFRS S1 :

It is general requirements for Disclosure of Sustainability-related Financial Information sets out the general requirements for a company to disclose information about its sustainability‑related risks and opportunities that is useful to users of general purpose financial reports (referred to as ‘investors’ throughout this document) in making decisions relating to providing resources to the company. IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures, both issued by the ISSB in June 2023, are the first IFRS sustainability disclosure standards.

IFRS S1 sets out the general requirements for a complete set of sustainability-related financial disclosures. IFRS S1 is designed to be applied in conjunction with IFRS S2, which is a topic-based standard that specifies disclosures relating to climate.

Effective date:

IFRS S1 and IFRS S2 are effective for annual reporting periods beginning on or after 1 January 2024, meaning that investors can begin to see information in 2025 based on companies applying the Standards for their 2024 reporting cycle. Companies are required to apply the two Standards together to assert compliance with IFRS Sustainability Disclosure Standards. However, the ISSB has provided reliefs from some requirements in the first year a company applies the Standards. For example, a company has the option to limit disclosures to information about climate related risks and opportunities in the first year that it applies IFRS S1 and IFRS S2. Although all public and private companies can apply IFRS S1 and IFRS S2, the ISSB does not have the right to mandate the application of the Standards. Companies can voluntarily apply these Standards, and jurisdictional authorities can decide whether to require companies to apply them.

IFRS S2 :

It is climate-related disclosures sets out the requirements for a company to disclose information about its climate related risks and opportunities, while building on the requirements described in IFRS S1. IFRS S2 integrates the recommendations of the Task Force on Climate related Financial Disclosures (TCFD) and requires the disclosure of information about both cross industry and industry‑specific climate related risks and opportunities.

GRI Framework : an Introduction

The GRI standards are the most widely used standards for sustainability reporting, currently used by over 10,000 reporters across more than 100 countries, and they are applicable to governments, corporations, large organizations and small organizations. They are particularly useful for tracking and reporting an organization’s efforts to reach net-zero emissions targets in their low carbon journey.

The user-friendly format also ensures the GRI standards can be adopted by subject-matter experts who may be less experienced and resourced when it comes to ESG and sustainability reporting. If an organization is not able to report in accordance with the preferred standards, they are still able to use them to report with reference to the GRI standards, making the standards a very accessible sustainability reporting tool for organizations of all sizes at all stages of the decarbonization journey.

The GRI standards are also particularly important for multinational organizations operating across several regions with different sustainability requirements, as they are consistent, measurable and comparable and can be understood under one standardized reporting “language.”

GRI standards are relevant to a range of internal and external stakeholders who are concerned about the transparency of an organization’s impact. These stakeholders commonly include employees, regulators, policymakers and investors who all have different reasons for accessing consistent integrated ESG reports.

SASB :

The Sustainability Accounting Standards Board (SASB), a non-profit organization founded in 2011, creates and maintains industry-specific standards that guide companies' disclosure of financially material sustainability information to investors and other financial stakeholders.

BRSR Introduction :

BRSR stands for "Business Responsibility and Sustainability Reporting" in India, which is a framework mandated by the Securities and Exchange Board of India (SEBI) that requires listed companies to disclose information about their environmental, social, and governance (ESG) performance through a standard reporting format. BRSR is a  reporting framework of ESG Management Practices in India, which involves promoting responsible business practices and sustainability initiatives within the country; essentially, it's a way for companies to transparently showcase their commitment to sustainability to stakeholders.

Key points about BRSR:

• Purpose:

  To encourage companies to integrate sustainability initiatives into their operations and report on their ESG performance in a transparent manner.

• Who regulates it:

  The Securities and Exchange Board of India (SEBI)

• What it includes:

  Reporting on aspects like environmental impact, social responsibility towards employees and communities, and good corporate governance practices.

• Benefits:

  Helps investors and stakeholders understand a company's sustainability efforts and make informed decisions.

BRSR principles :

• Ethical Business Conduct: Operate with integrity, transparency, and accountability.

• Employee Welfare: Respect and promote the well-being of all employees, including those in the value chain.

• Stakeholder Engagement: Be responsive to the needs and interests of all stakeholders.

• Human Rights: Respect and promote human rights across the business operations.

• Environmental Responsibility: Protect and restore the environment, taking steps to minimize environmental impact.

• Community Development: Contribute to inclusive growth and equitable development in the communities where the business operates.

• Consumer Protection: Engage with consumers responsibly, providing safe and sustainable products.

• Fair Competition: Conduct business in a manner that complies with fair competition laws.

• Policy Engagement: Participate in public policy discussions responsibly and transparently.

What is DJSI ?

The Dow Jones Sustainability Indices (DJSI) is a group of indices that measure the company's performance  based on environmental, social, and economic parameters. It's a benchmark for investors who want to consider sustainability when building their portfolios.

What does the DJSI do?

• Tracks the stock performance of companies that are leaders in sustainability

• Helps investors create portfolios of companies that are more sustainable than their peers

• Promotes sustainability and transparency as important factors for shareholders

• Helps companies identify areas for improvement and set sustainability goals

What does the DJSI include?

• The DJSI World, which includes the DJSI Emerging Markets

• DJSI Regions, such as Europe, Asia Pacific, North America, and Nordic

• DJSI Countries

• Sub-indices that exclude companies involved in certain activities

How is the DJSI calculated?

• The DJSI is based on the Total Sustainability scores from the annual S&P Global Corporate Sustainability Assessment (CSA)

• The DJSI assesses companies on issues such as corporate governance, risk management, climate change mitigation, and labor practices

Who created the DJSI?

• S&P Dow Jones Indices and SAM (Sustainable Asset Management) created the DJSI in 1999

What is EcoVadis :

It is a platform that assesses company's performance on sustainability. It provides insights to companies into their strengths and areas for improvement. EcoVadis also helps companies manage sustainability risk and compliance.

What does EcoVadis do?

• Evaluates sustainability performance

  EcoVadis assesses companies based on international sustainability standards. It evaluates a company's policies, actions, and measurable outcomes.

• Provides sustainability ratings

  EcoVadis provides sustainability ratings in the form of scorecards and medals. The score cards range from 0 to 100, and the medals are bronze, silver, or gold.

• Helps companies manage sustainability risk

  EcoVadis helps companies manage sustainability risk and compliance, meet sustainability goals, and achieve net-zero targets.

• Shares sustainability performance information

  EcoVadis is a collaborative platform that allows trading partners to share sustainability performance information.

What does EcoVadis use?

• EcoVadis assesses companies based on international sustainability standards, including the Global Reporting Initiative (GRI) and the United Nations Global Compact (UNGC).

The EcoVadis methodology framework assesses companies' policies and actions as well as their published reporting related to the environment, labor and human rights, ethics and sustainable procurement.

What is CDP ?

The Carbon Disclosure Project (CDP) is a non-profit organization that helps companies and cities disclose their environmental impact. It's the world's largest environmental database, and its scores are used to drive investment and procurement decisions.

What does CDP do?

• Helps companies and cities measure, disclose, manage, and share environmental information

• Reduces greenhouse gas emissions

• Safeguards water resources

• Protects forests

• Mitigates climate change risk

• Provides data to inform investment risk and commercial opportunity

How does CDP work?

• CDP uses capital markets and corporate procurement to motivate companies to disclose their environmental impacts

• CDP scores are widely used to drive investment and procurement decisions

Who uses CDP?

Companies, Cities, States, Regions, Financial institutions, Investors, and companies.

The Carbon Disclosure Project (CDP)

It is a global non-profit organization that operates the world's largest environmental disclosure system, encouraging companies, cities, states, and regions to transparently report on their environmental impacts, particularly regarding greenhouse gas emissions, water usage, and deforestation, to investors and stakeholders through annual data submissions; essentially acting as a platform to incentivize sustainable practices by providing a standardized way to measure and disclose environmental performance, ultimately influencing investment and procurement decisions towards a low-carbon economy.

What is MSCI ?

Full form of MSCI is  Morgan Stanley Capital International, is a company that provides stock indexes, analytics, and tools to investors. MSCI's services help investors understand risk and return, and build more effective portfolios.

What MSCI does:

• Provides indexes: MSCI provides stock indexes, including the MSCI Emerging Market Index and the MSCI Frontier Markets Index.

• Provides analytics: MSCI provides analytics on portfolio risk and performance.

• Provides tools: MSCI provides tools to help investors detect risk and opportunity.

• Conducts research: MSCI conducts research on data and technology to help investors make better decisions.

Who uses MSCI's services?

Institutional investors, Hedge funds, and Index funds (ETFs).

Where is MSCI headquartered?

• MSCI's headquarters are located at 7 World Trade Center in Manhattan.

Sustainalytics ESG Ratings :

It is  "ESG Risk Ratings,"  a system used to assess a company's exposure to material environmental, social, and governance (ESG) risks and how well it manages those risks, providing a score that indicates the company's overall ESG risk level across different industries, allowing investors to compare companies based on their sustainability practices; essentially, a higher rating signifies better ESG risk management by a company.

Key points about Sustainalytics ESG Ratings:

• Focus on materiality:

  The ratings evaluate ESG factors that are most relevant to a company's specific industry and business operations.

• Risk-based approach:

  Rather than simply ranking companies against each other, Sustainalytics assesses the potential financial impact of ESG risks on a company's value.

• Comprehensive analysis:

  They take into account both a company's exposure to ESG risks and how well it manages those risks.

• Industry comparisons:

  Allows investors to compare a company's ESG performance against its peers within the same sector.

Materiality topics :

These are the most important economic, social, and environmental issues that a company faces. They also include topics that have a significant impact on the decisions of stakeholders.

Why are materiality topics important?

• Identify risks and opportunities

  Materiality topics can help companies identify potential areas of risk and opportunity.

• Prioritize sustainability efforts

  Materiality topics can help companies focus their sustainability efforts on the issues that matter most.

• Understand stakeholder views

  Materiality topics can help companies understand how their products and services are perceived by stakeholders.

Types of materiality topics

• Financial materiality: The impact of a company's activities on its financial position

• Environmental materiality: The impact of a company's activities on the environment

• Social materiality: The impact of a company's activities on society

• Impact-based materiality: The impact of a company's activities on the economy, environment, and people

Materiality assessments

• Materiality assessments are formal exercises that help companies identify and prioritize materiality topics.

• Materiality assessments can involve engaging with external stakeholders to understand their views on a company's products and services.

Governance Metrics and Selection of Indicators :

It refers to the process of identifying and choosing specific, measurable indicators that allow an organization to evaluate the effectiveness of its governance practices across different areas like risk management, compliance, decision-making, and stakeholder engagement; essentially, it's a way to track and assess how well an organization is governed by using quantifiable data points.

• Key points about Governance Metrics and Selection of Indicators:

  • Purpose:

    To provide objective insight into the quality of governance by measuring key aspects like policy adherence, decision-making efficiency, risk mitigation effectiveness, and stakeholder satisfaction.

  • Indicator Selection:

    • Relevance: Chosen indicators should directly relate to the specific governance goals and objectives of the organization.

    • Measurability: Indicators should be quantifiable with clear data collection methods.

• Accessibility: Data needed for the indicators should be readily available and reliable.

• Common Governance Metrics Categories:

  • Strategic Governance: Alignment with strategic objectives, goal achievement rates.

  • Risk Management: Number of identified risks, risk mitigation success rate, incident response time.

  • Compliance: Audit compliance rate, regulatory non-compliance occurrences.

  • Board Effectiveness: Board meeting attendance, director engagement, diversity on the board.

  • Stakeholder Management: Stakeholder satisfaction levels, feedback response time.

Example Indicators:

• Financial Performance: Return on equity, profit margin

• Operational Efficiency: Productivity metrics, process cycle time

• Customer Satisfaction: Customer retention rate, Net Promoter Score

• Employee Engagement: Employee turnover rate, employee satisfaction surveys

Important Considerations:

• Contextualization:

  Metrics should be interpreted within the organization's specific context and industry standards.

• Benchmarking:

  Comparing governance metrics against industry peers or competitors can provide valuable insights.

• Regular Review:

  Governance metrics should be regularly monitored and updated to reflect changing business needs and regulatory landscape.

Peer benchmarking in ESG:

It refers to the practice of comparing a company's Environmental, Social, and Governance (ESG) performance against its industry peers, allowing them to assess how their sustainability initiatives stack up against competitors and identify areas for improvement within their sector.

What is Greenhouse gas (GHG) emissions

GHG is release of gases into the atmosphere that trap heat and contribute to global warming.

What causes GHG emissions?

Human activities

• The burning of fossil fuels for transportation, heat, and electricity is the largest source of GHG emissions in the United States. Other human activities that contribute to GHG emissions include deforestation, cement production, and the use of fertilizers.

• Natural processes

  Some GHG emissions are caused by natural processes, such as the release of methane from landfills and agriculture.

What are the effects of GHG emissions?

• Global warming: GHG emissions are the primary cause of global warming.

• Climate change: The increase in GHG emissions has led to climate change, which impacts the environment, human health, and the economy.

What are some examples of GHGs?

• Carbon dioxide (CO2)

  A long-lived GHG that can persist in the atmosphere for centuries or even thousands of years.

• Methane (CH4)

  A short-lived GHG that is removed from the atmosphere relatively quickly, with an average lifetime of around 12 years.

• Nitrous oxide (N2O)

  A GHG that is emitted from fertilizer application, fossil fuel and biomass combustion, and industrial processes.

Scope 1, 2, and 3 emissions are category  where a company or organization’s emissions are emanating.  These categorizations first appeared in the Greenhouse Gas Protocol in 2001, the world’s most widely used greenhouse gas accounting standard.

While the first scope comes from direct emissions owned or controlled by a company, Scope 2 and 3 are indirect emissions that come about because of what that company does. These emissions come from sources not owned or controlled by the company.

The Science Based Targets Initiative (SBTi) is an organization that helps companies and financial institutions set goals to reduce greenhouse gas emissions. The SBTi's goal is to help the private sector take action on climate change and reach net-zero carbon emissions by 2050.

Decarbonization

It refers to the process of significantly reducing or eliminating carbon dioxide emissions, primarily by transitioning from fossil fuels to renewable energy sources like solar and wind power, with the goal of mitigating climate change; it's a key environmental factor companies are increasingly focused on managing and reducing within their operations.

Key points about decarbonization in ESG:

• Focus on carbon emissions:

  The primary goal is to minimize the amount of carbon dioxide released into the atmosphere, contributing to climate change.

• Renewable energy transition:

  A major aspect of decarbonization involves switching from fossil fuels to renewable energy sources like solar, wind, and geothermal.

• Energy efficiency improvements:

  Optimizing energy usage within operations can also be a key part of decarbonization strategies.

• Carbon capture and storage (CCS):

  Some decarbonization strategies include technologies to capture carbon dioxide emissions and store them underground.

Why is decarbonization important in ESG?

• Investor demand:

  Investors increasingly prioritize companies with robust sustainability practices, including decarbonization efforts, when making investment decisions.

• Regulatory pressures:

  Governments around the world are implementing regulations to reduce carbon emissions, pushing companies to decarbonize.

• Brand reputation:

  Taking action on climate change through decarbonization can enhance a company's public image and reputation.

Sustainable Finance

It is the practice of considering environmental, social, and governance (ESG) factors when making financial decisions. The goal is to invest in projects that promote sustainable development.

What does sustainable finance consider?

• Environmental factors: Climate change, biodiversity, pollution, waste management, and air quality

• Social factors: Human rights, labor relations, inequality, and inclusiveness

• Governance factors: Board diversity, stakeholder accountability, and measures against bribery and corruption

Why is sustainable finance important?

• It helps manage climate and other sustainability risks

• It helps meet society's expectations for a more sustainable economy

• It helps re-orient investments towards sustainability goals

Examples of sustainable finance

• Green loans: Loans used to fund projects like installing solar panels or improving energy efficiency

• Green bonds: Bonds linked to specific projects or purposes

• Sustainable project finance: Financing projects through a Special Purpose Vehicle (SPV) company

Designing a proper stakeholder engagement framework is vital for ESG success. Start by identifying relevant internal and external stakeholders, such as employees, customers, investors, suppliers, and community members. Understand their priorities, concerns, and expectations on environmental, social, and governance issues. Clearly define engagement objectives within your ESG strategy, aiming to build trust, gather feedback, and foster collaboration. Then, select effective communication channels like meetings, surveys, or online platforms. Finally, establish KPIs to measure effectiveness and implement feedback loops for continuous improvement.