ESG stands for Environmental, Social and Governance. ESG is a term frequently used by investors and ethically responsible companies to evaluate corporate behavior, societal and environmental impact and also the future performance of companies. It basically focuses on the Environmental, Social and Corporate Governance issues of a company in order to measure their sustainability and ethical & social impact of an investment in a business.

The UN SDGs are divided into 17 categories:

  • No Poverty
  • Quality Education
  • Affordable and Clean Energy
  • Reduced Inequalities,
  • Climate Action
  • Peace, Justice & Strong Institutions
  • Zero Hunger
  • Gender Equality
  • Decent Work and Economic Growth
  • Sustainable Cities and Communities
  • Life Below Water
  • Partnerships for the Goals
  • Good Health and Well-being
  • Clean Water and Sanitation
  • Industry, Innovation, & Infrastructure
  • Responsible Consumption and Production
  • Life on Land

The alignment of the ESG goals with one or more “UN SDGs” is being claimed by most of the companies, funds and regulators. The SDGs were adopted by all United Nations members’ states at the United Nations sustainable development summit in September 2015, with the main goal to protect the planet and to improve quality of life globally. The UN SDGs also aims to set targets to end poverty and hunger, enhance education, protect the environment and to ensure that all people enjoy peace and prosperity.

The Paris Agreement is a multi-nation pact developed by parties to the United Nations Framework Convention on Climate Change (UNFCCC) to combat climate change. The Paris Agreement central aim is to control the global temperature rise in this century to below 2 degrees Celsius above pre-industrial levels, and to put efforts to limit the rise to 1.5 degrees.

The Paris Agreement was drafted in December 2015, and went into effect as of November 2016. There are 189 countries that are party to the agreement, and 195 signatory countries. Most of the companies have set their climate-related targets in order to be in line with the Paris Agreement.

When the investors select stocks with specific characteristics to manage the impact such as gender diversity or environment protection, it is known as impact investing. Impact investing is an umbrella term to refer to investments made into companies, organizations, or funds with the idea of generating positive social, ethical and environmental impact apart from high financial return. Impact investments are getting more and more popular for getting higher and safer return to investors while addressing social and/or environmental issues.

The six Principles for Responsible Investment are a voluntary and aspirational set of investment principles that offer a menu of possible actions for incorporating ESG issues into investment practice. The 6 principles established by the PRI for the investors to follow are:

Principle 1 We will incorporate ESG issues into investment analysis & decision-making processes.

Principle 2 We will be active owners & incorporate ESG issues into our ownership policies.

Principle 3 We will seek appropriate disclosure on ESG issues by the entities in which we invest.

Principle 4 We will promote acceptance and implementation of the Principles within the investment industry.

Principle 5 We will work together to enhance our effectiveness in implementing the Principles.

Principle 6 We will each report on our activities and progress towards implementing the Principles.

GRI Sustainability Reporting Standards are the most common globally accepted standards for sustainability reporting by companies. These standards help to allow consistent reporting across companies and also provide clearer communication to stakeholders regarding sustainability matters. A wide range of ESG-related topics, ranging from anti-corruption practices to biodiversity and emissions are reported by GRI standards.

In 2015, the GRI established the Global Sustainability Standards Board (GSSB) as an independent operating entity. GRI sustainability standards are being developed by the GSSB.

Environmental, Social and Governance factors are rapidly becoming important in investor cognizance worldwide. But why is this an important parameter to consider – when it comes to any business; sustainability, equality, and a clean environmental records are essential components which reflect the health and safety system, as well as the future financial performance of the company. In past few decades, several corporate disasters have been noticed related to ESG factors such as oil spills, regulatory lawsuits, bankruptcy due to wildfires, harassment cases, and many more. And thus, savvy investors are starting to embrace these determinants as well while deciding their investment portfolio. It is evident from the studies that the portfolio/company with better ESG scorecard perform better in different financial aspects, like stock market performance. Moreover, MSCI reports that high-ESG companies experience lower cost of capital, less volatile earnings and lower market risk compared to low-ESG companies. Thus, it is no more the game of only top-line, bottom-line or maximizing shareholders’ return, but to have a sustainable and healthy system which eventually benefit people and planet in addition to profit.

The ESG disclosure rules vary by region and are less universal than the financial disclosures. The regulators and other third-party organizations are developing more firm disclosure standards for companies as the investors look for a better sustainable accountability from companies.The organization developing the new ESG disclosure rules comprises of:

  • Sustainability Accounting Standards Board (SASB): The Sustainability Accounting Standards Board (SASB) Foundation is a non-profit organization, with an aim to establish industry-specific ESG disclosure standards for companies. The standards help the investors to assess the materiality of reported sustainability information, and also helps in comparing the companies on the basis of these metrices globally
  • Task Force on Climate-related Financial Disclosures (TCFD): The Task Force on Climate-related Financial Disclosures (TCFD) was established by the Financial Stability Board (FSB) in 2015, with an aim to develop consistent disclosure standards for companies, to be used on a voluntary basis for the investors and other stakeholders in order to approach the company’s climate-related financial risk
  • Global Reporting Initiative (GRI): GRI sustainability reporting standards are the most commonly accepted global standards for sustainability reporting. These standards are guides for consistent reporting across companies and also provide clearer communication to stakeholders regarding sustainability matters. A wide range of ESG-related topics, ranging from anti-corruption practices to biodiversity and emissions are reported by GRI standards

Important impediments to the use of ESG information and data are the lack of reporting standards and as a result lack of comparability, reliability, quantification and timelines. Moreover, there is no smart integrated solution for ESG evaluation and compliance monitoring. Therefore, there is a need for a solution to provide information and insights in autonomous, intuitive and simple manner. ESG++ is a one-stop tool for measurement, evaluation and improvement of your systems associated with environment and societal impact of business. All three major components, ESG, +, and + deliver an important aspect here –

  • ESG stands for a scorecard for quantitative and qualitative evaluation of Environmental, Social and Governance factors of a company. There are, in total, 20 different scorecards around Environment, Social and Corporate Governance
  • First + ensures compliance to regulations in the area of sustainability, safety and societal impact such as EHS
  • Second + gives a comprehensive and tailored reports and recommendations to help you set and achieve your goals whether it is informed investment decisions, or to be more sustainable and achieve circular economy

The reports and recommendations provided make sure that company achieve their ‘Triple Bottom Line’ objectives by adhering to the circular economy principle and that too with enhanced profitability.

Following is the brief description of the methodology used. For further details refer to the methodology document.

  • A. All 3 pillars E, S and G have been further divided into 16 different categories or key-issues as below.
  • Environment Protection (13)
  • Emission (35)
  • Resource Use (41)
  • Product Innovation (21)
  • Human Rights (12)
  • Workforce Diversity (7)
  • Employment (13)
  • Health & Safety (24)
  • Training & Development (6)
  • Community Responsibility (24)
  • Product Responsibility (29)
  • Board Functions (15)
  • Board Structure (18)
  • Compensation Policy (13)
  • Vision and Strategy (10)
  • Shareholder Right (27)
  • In total, 308 key indicators (including some sector specific indicators) have been identified under these categories after underpinning GRI and DJSI principles.
  • The data related to these indicators have been extracted using a specialized data research team as well as employing AI/ML technologies. Company disclosure is at the core of our methodology and thus, all the data are extracted from various publicly available information, viz., annual reports, sustainability/CSR reports, NGO reports, analyst reports and various news sources
  • A benchmarking is done with peer companies operating in the sector as well as country norms. The idea is to facilitate comparable analysis within peer groups
  • All the qualitative and quantitative data goes through a well-defined algorithm to provide a score on a scale of 0 to 1. Sector specific weights have been employed for different indicators and finally the score has been calculated. A percentile and grading-based score have been evaluated for easy understanding and better comparability
  • ESG++ provides the user with a customized and user-friendly dashboard with easy-to-understand brief reports. Following are the main features of ESG++:

    Overall ESG score with 19 other sustainability and societal impact scores with detailed analysis. Easy-to-understand percentile and grading-based system; peer-to-peer comparison; color coding to represent risk heat-map; option to see entire industry performance; historical performance of the companies using time-series data; indicator-based analysis; comparison with sector leaders; customize option to choose as many companies, user want to study their scores together, option to highlight major pain points and best points in the company’s performance

    EHS report – ensuring compliance to regulations in the area of sustainability, safety and societal impact

    Comprehensive and tailored reports and recommendations to help you achieve your goals whether it is informed investment decisions, or to be more sustainable and adhere circular economy

    Insights and Gaps in entire supply chain of the company – option to evaluate suppliers’ sustainability

    The Dow Jones Sustainability Indices (DJSI) launched in 1999, are a family of indices evaluating the sustainability performance of thousands of publicly traded companies, operated under a strategic partnership between S&P Dow Jones indices and RobecoSAM (Sustainable Asset Management) of the S&P Dow Jones indices. They are the longest-running global sustainability benchmarks worldwide and have become the key reference point in sustainability investing for investors and companies alike. In 2012, S&P Dow Jones Indices was formed via the merger of S&P Indices and Dow Jones Indexes. The DJSI is based on an analysis of corporate economic, environmental and social performance, assessing issues such as corporate governance, risk management, branding, climate change mitigation, supply chain standards and labor practices.

    Most major index providers have developed numerous ESG investment benchmarks, and continue to release new indices. Available benchmarks cover a broad range of geographies, assets classes and ESG topics. Index providers with ESG indexes include S&P (S&P 500 ESG Index, S&P Global 1200 ESG Index, S&P Europe 350 ESG Index, S&P Japan 500 ESG Index, etc.), MSCI (MSCI ESG Leaders Indexes, MSCI ESG Focus Indexes, MSCI ESG Universal Indexes, etc.), and FTSE Russell (FTSE Developed ESG Index, FTSE Emerging ESG Index, FTSE All-share ESG Index, Russell 1000 ESG Index, etc.), among others

    There are numerous studies on this which reveal that the companies which perform better on ESG front are more profitable in medium to long run. Oxford University and Arabesque Partners conducted a meta-study entitled ‘From the stockholder to the stakeholder’ based on a detailed analysis of more than 200 different sources. This study confirmed that there is a conclusive correlation between good business practices in sustainability and economic profitability. The idea is better ESG provides company with a healthy and safe environment in its value chain which provides sustainability to the company operation and thus profitability.

    Recent findings provide evidence that companies rated high in terms of Environmental, Social, and Governance (ESG) score report higher excess returns and lower volatility. It is observed that stronger ESG scores correlate into higher returns because investors believe that better ESG score provide sustainable future to the company.

    ESG++ provides a real-time monitoring with tailored reports and recommendations to achieve ‘Triple Bottom Line’ (TBL) targets of the company and adhere to circular economy principle. It helps company in monitoring its improvement with respect to carbon footprint and other societal impact with time. Thus, with this tool, the company can observe its performance in its overall supply chain and can red marked the area which needs improvement. Azyro’s competent and experienced team offers specialized solution frameworks to come up with best-in-class recommendation and implementation strategies.