ESG is an analytical framework relating Environmental, Social, and Governance performance to outcomes specifically understanding of how a company’s operations, culture, and structure influence performance.
As an analytical framework, there are various approaches to ESG, but the most common is the incorporation of what is traditionally referred to as extra-financial information into a determination of how a company is positioned to benefit from or be exposed to changing social, political, economic, and environmental landscapes over time. In short, ESG is concerned with using more data to develop a more complete understanding of how a company operates and how a company is likely to operate within the changing world we each anticipate. It is a lens into the Business & Society relationship.
With the emerging topic, it is good to clarify what ESG is not:
ESG is not a product. You do not invest in ESG, rather you invest with ESG. It is not an asset class but rather an analytical framework applicable to all asset classes. ESG is an analytical framework to understand assets of interest, but it is not an asset itself. There is no ESG Company or ESG fund, there are only companies or funds whose ESG profiles align with your own decision-framework.
ESG is not a choice. All companies have ESG data and profiles whether or not they choose to optimize it, acknowledge it, or disclose it. A third-party can derive ESG data about any company. Companies do not choose to have an ESG profile, but they can choose to optimize their ESG profile. You can ignore your shadow, but you can’t escape it.
ESG is context-dependent. ESG relates performance to social, environmental, economic, and political developments…and anticipated developments. In this sense, it is highly context-dependent. By optimizing your ESG profile, businesses can develop a strategy meaningful within their own context but certainly they should not lose sight of the changing contexts around them.
ESG is Objective. ESG data can be incorporated into a decision-making framework, but it is your decision-making process, and not the ESG data, which determines value. ESG is neither good nor bad, rather it is how you interpret the ESG data and to what end which determines the outcome.
ESG is not Sustainability or Impact or Social Responsibility. With the growing interest in ESG, it is often used as short-hand for Sustainability or Impact or Socially Responsible Investing. ESG holds great promise, but it is disingenuous to represent it as something other than what it is. ESG data can be engaged to assist in determinations of Sustainability or Impact or moral alignment, but is none of these on its own. Sustainability, Impact, and Social Responsibility are subjective determinations, ESG data are objective inputs (see above point). Just as in a bakery, many different treats can be baked from the same ingredients–the trick is in how you combine them.
In the end, ESG is not a product or an outcome, rather it is a framework for making sense of the Business & Society relationship.
Source: Sustainable Business Consulting