Some time back, the awareness of ESGEnvironmental, Social, and Governance) changing the way the world views business and investment.
Environmental, Social, and Governance being a principle that emphasizes the balance between business profits with social and environmental responsibility.
The complexity of the current conditions creates a guide for companies in conducting sustainable business.
Therefore, let us understand together about the concept Environmental, Social, and Governance, the underlying principles, to the impact for the company and society.
Understanding ESG and its principles
What is ESG? is a guide that companies apply when investing, taking into account aspects Environmental, Social, and Governance.
It grew out of investors ' awareness of the importance of sustainable business models.
Make it the basis for every long-term business decision.
Thanks to the application of Environmental, Social, and Governance, the company has direction in risk management, reputation building, and impact on Environment & Society.
The following are the 3 main pillars of ESG:
- Environmental (Environment): the company takes into account the impact on the environment, such as limbang, greenhouse gas emissions, and the use of clean energy.
- Social (Social) : interaction with the community comes first here. Issues on human rights, work dynamics, diversity and inclusivity, community involvement, and K3.
- Governance (Corporate Governance): the company strives for the best in risk management, transparency, accountability, and integrity
See Also : What is Good Corporate Governance, Benefits and Principles
ESG criteria in the business world
1. Environmental Criteria
The company considers the impact of operational activities carried out on the surrounding nature while maintaining a healthy and stable environment.
Some of the main keys in this case include, clean resources, efforts to reduce pollution, waste management generated, and preservation of Natural Resources.
Through good judgment and wise decision making, it is possible for a business to operate in the long term.
2. Social Criteria
The entire community that is close to the scope of the company, including the workers in it, is the main key in this matter.
The company must build relationships with all external and internal parties, including the community, suppliers, customers, and the media.
The positive and real contribution of the company to the social issues faced is a supporting factor for the company's sustainability in the future.
3. Corporate Governance Criteria
Corporate governance is closely related to investor confidence to weigh all aspects of the company's sustainability.
Some of the concerns investors have with corporate governance include, corporate policies, standards set, culture built, transparency, audit quality, and compliance.
For example, how well the company executes tax regulations through tax audits conducted by tax authorities. This is one of the considerations for investors.
See Also :Get To Know Tax Audits Starting From The Types, Examples & Process Of Conducting Audits!
Implementing ESG in the company
Companies that have a positive impact on the environment and social become the target of investment-based Environmental, Social, and Governance.
Thus, the usefulness of the company for employees & workers, the environment & surrounding communities, until the government becomes the value held, in addition to only aiming for profit or ROI.
In the long run, implementation Environmental, Social, and Governance proven to be able to raise the value of the company to a significantly higher position.
So, how is the investment strategy to run effectively and generate profits in companies based Environmental, Social, and Governance this? let's see more fully below.
ESG implementation steps
1. Exclusive
Investors need to do make a list of companies, and compile it in the form database.
Then the classification of these companies to be selected, which include blacklist (blacklist) and not.
Companies that cause damage to the environment, disturb local residents, and illegal transactions must be included in the Black List.
2. Best in its field
Keep in mind that not all companies that implement ESG are suitable for investment targets.
Categorization of companies is done to divide which companies are still developing, have the potential to be the best, and which have become the best in their fields.
Aside from the company's potential, investors also assess the company's reputation in the community, environmental impact, compliance with rules, and governance.
3. ESG integration
Investment decisions need to go through the stages of ESG aspect analysis by the investment manager of a company.
ESG factors are integrated into the adjustment of sales and cost estimates. Later, it is known whether the valuation offered by the company is promising or not as an investment target..
4. Sustainability investment
This strategy is not targeting companies that need to be assessed from their ESG side.
But rather, directly at companies engaged in certain fields with a focus on environmental and social related businesses.
For example, investors directly choose to invest in plastic waste management companies into versatile products.
Investors choose companies that directly contribute to environmental and social progress through the products they offer.
5. Green bonds
This strategy is similar to sustainability investment, only there are differences in the form of investment that investors make in the company.
If in sustainability investments, investors buy company shares that are used for company operations.
Unlike green bonds, investors only buy bonds or debt securities on projects they are working on.
6. Positive impact investments
Investors consider closely and appropriately the company's environmental and social impact.
An assessment of the company's influence on reducing water and air pollution becomes the main value before investors put funds.
If the investor has assessed the overall effect can be said to be good and measurable, then the investment through the purchase of stocks or bonds is done.
7. Management and engagement
This strategy involves intervening between the investment manager and the company's management to ensure the business is run according to ESG.
Proper supervision and direction is an important point for investment managers before deciding which company to go to.
Challenges in ESG implementation
Here are some of the challenges faced when ESG is implemented by a company.
- Significant implementation costs: the need for initial investments with large costs for technology and labor training.
- Lack of uniform regulatory standards: difficulty in determining appropriate metrics and indicators for performance measurement.
- Difficulty in measuring ESG impacts: complexity in measuring environmental and social benefits.
- Change in organizational culture: if companies typically adopt conventional practices that then integrate ESG, there can be resistance from employees or stakeholders.
- Stakeholder pressure: changes that take time to make a significant impact will face pressure from investors or customers.
- Limited resources and expertise: an adequate number of human resources or expertise is one of the challenges in ESG implementation.
- Risk of Greenwashing: for the sake of public image, companies can manipulate ESG impact results that will damage image and trust when revealed.
- Adaptation to regulatory changes: companies must be able to adapt quickly to the development of ESG regulations as a form of compliance and avoid sanctions
- Integration with business strategy: careful planning is required to align with the company's goals, and still continue to provide added value.
- Complex supply chain management: a challenge as the entire supply chain must be ensured to comply with ESG standards. Especially if the supplier comes from a country that has different regulations.
Benefits of ESG for companies and investors
The implementation of ESG can have a significant positive impact on companies and investors. Here are the benefits that both parties will get.
1. Benefits For The Company
The benefits obtained by the company through the implementation of ESG one of them is improving the reputation and image in the eyes of the public, consumers, and investors.
In addition, ESG also makes it easier for companies to access sustainable funding and investment because today, many investors are looking at businesses that have an environmental and social impact.
In terms of its own operations, it can help companies better manage risks related to environmental and social issues.
Not only that, the implementation of ESG has proven to be able to reduce production costs and increase profits. One of them is through energy savings.
The company will also have high competitiveness because it is able to attract customers, partners and a quality workforce that cares about sustainability.
2. Benefits For Investors
For investors, long-term investment risks are actually safer because of the implementation of ESG in the company.
More stable financial performance, making the company better prepared in the face of regulatory changes, environmental risks, and social pressures.
Investments become more secure and profitable in the long run and future-oriented.
Conclusion
The application of ESG is not only a trend, but also a need for investors and companies in the modern business era.
ESG helps companies improve reputation, manage risk, operational efficiency, and positive impact in increasing profits.
Meanwhile, investors get more stable, profitable and sustainable investment opportunities.
Thus, ESG strengthens the company's competitiveness while still contributing to creating a positive impact on the environment and society.
If you want to understand more about ESG implementation or need further consultation.
Please do not hesitate to contact us via this Contact page.
Audithink is ready to help you design an effective ESG strategy for your business.
