What Are the Three Pillars of ESG?
In many companies there remains a large gap between the ESG expectations of company stakeholders (investors, customers, employees, regulators) and company commitment. Given that a slew of sustainability disclosure standards are due to be adopted during 2023 and that growing numbers of institutional investors are increasingly active in expressing their dissatisfaction with companies failing to set or hit environmental or social targets, now would seem to be a very good time for all businesses to ensure that they have a robust ESG strategy and framework in place.
The first step in doing so is to properly understand the three pillars of ESG – Environment, Social, Governance – so as to be able to prioritise and apply them in a manner that is consistent with the purpose and objectives of the business:
Pillar 1: Environment
The key question here is how the actions of a company affect the environment. The scope of “company actions” can, of course, be broad and could include the environmental impact of business operations and locations; of the company’s products and services; of the company’s third party supply chain partners, etc.
Environmental impacts to be evaluated are equally broad: the use of fossil fuels and carbon footprint; the management of water and other resources; contribution to pollution levels; the use of hazardous materials and their disposal; packaging and waste; greenhouse gas emissions and the use of clean energy sources; etc.
Pillar 2: Social
How do the company’s behaviours affect society? Again, depending on the nature of the business, the scope could be broad and might include:
Employee considerations, e.g., diversity and inclusion; training and career development; employee health and safety; approach to work-life balance; etc.
Product and service safety and liability approach
The social impacts of business operations, e.g., human rights transparency through the supply chain; stance and actions around data privacy, etc.
Pillar 3: Governance
How high are the governance standards under which the company operates? Can investors, employees, customers, regulators trust that the business is being managed to high levels of effectiveness and to high ethical standards?
No surprise that here too the scope can be broad and might include: Board composition and independence; tax strategy and accounting standards; anti-bribery and corruption standards; justifiable executive remuneration; policy transparency, etc.
Clearly the three pillars of ESG could be interpreted very broadly. Two approaches appear to be emerging. The first is to adopt “minimum compliance” – minimising adverse environmental and social impacts to the extent required to satisfy investor and regulatory expectation. The second – with an aim to drive beneficial enhancements to reputation and brand and to employee motivation and retention and, frankly, to making the world a better place – goes further and yields an ESG strategy that fits well with the company’s purpose, proactively enhancing selected ESG activities beyond the minimum. A business with a strong local footprint might engage in local community building initiatives. A manufacturer with a sizeable global supply chain footprint might take an advocacy position on ethical working practices and human rights. A large technology company might seek to lead its sector in innovations in data centre energy reduction.
ESG will mean different things to different companies. Understanding the components of the three pillars, setting an appropriate level of ambition and tailoring an ESG approach that aligns with company purpose and objectives are arguably a very good way to start.