ESG relates to a set of criteria used to assess an organisation’s environmental, social and governance footprint. While there is an overlap with sustainability, ESG is narrower in focus whereby an organisation is evaluated based on these factors.
Environmental, Social, and Governance (ESG) criteria have become increasingly vital in investment decision-making, reflecting a paradigm shift towards sustainable and responsible business practices.
What is ESG?
Environmental
Environmental considerations within ESG focus on a company's efforts to minimize its ecological footprint. This involves assessing initiatives related to carbon emissions, energy efficiency, and resource conservation. Investors are increasingly recognizing the importance of supporting companies that prioritize environmental sustainability to address the pressing challenges of climate change.
Social
The Social component of ESG evaluates a company's impact on society. This includes aspects such as labour practices, diversity and inclusion, and community engagement. Investors are placing greater emphasis on companies that actively contribute to social welfare, promote diversity in their workforce, and maintain positive relationships with the communities in which they operate.
Governance
Governance, the third pillar of ESG, focuses on the structure and management practices of a company. Investors scrutinize factors like board composition, executive compensation, and transparency in financial reporting. Effective governance is seen as a key indicator of a company's long-term stability and ethical practices.
Why does ESG matter?
The integration of ESG criteria into investment decisions is not merely altruistic but has proven financial benefits. Studies show that companies with strong ESG performance are often more resilient, enjoy better long-term financial performance, and are better positioned to navigate risks. As a result, ESG considerations have evolved from being a niche concern to a mainstream investment strategy.
Furthermore, regulatory bodies and standard-setting organizations are increasingly pushing for more transparency in ESG reporting. Internationally, there are increasing jurisdictions where businesses are now expected to disclose comprehensive information about their ESG practices, enabling investors to make informed decisions. This push towards transparency reflects the growing recognition of ESG as a crucial factor in assessing a company's overall health and sustainability.
In Conclusion, the rise of ESG criteria in investment decisions signifies a broader shift towards sustainable and socially responsible business practices. Investors are not only seeking financial returns but also aligning their portfolios with companies that prioritize environmental stewardship, social responsibility, and effective governance. As the momentum behind ESG continues to grow, businesses are compelled to integrate these principles into their core operations to thrive in an evolving economic landscape.
Our view is that ESG is here to stay and while it might take time for the New Zealand SME sector to fully embrace it, it’s a case of “when” and not “if”. Businesses that fully embrace the concept rather than demonstrate tokenism will thrive by aligning commercial and societal outcomes that are symbiotic.