Striking a Good Balance Between Environmental Social and Governance
- There is no doubt that the ESG agenda is over politicized and we can even argue that the movement is not prioritizing the Social and Governance aspects as much as the Environmental component
- The private sector, capital markets and civil society groups also play a leading role which are demanded by societal and market forces
- While global standardization for disclosure, ESG scoring and compliance is going to be impossible, we should seek greater cooperation and flexibility in order to create balanace incentives for all stakeholders
Analyzing businesses in 2022 calls for a keen understanding of the dynamics needed to be successful. Top investors have, as a result, implemented measuring tools to assess businesses with. The letters E, S, and G combine to give investors a sure grasp on how to rate the companies they prioritize. Investors, however, have to strike a strong balance between the ideals that businesses portray. A good balance could result in the perfect investment, particularly given the excessive politicization of the climate debate.
Environmental
It’s important to assess the environmental impact that a business has because of the renewable resources we’re scouting as well as for the carbon footprint they leave behind. Not everything is solar-powered or with zero emissions, but the pressure is on businesses to reach these goals. Businesses that don’t achieve these still need to establish a criterion that acknowledges and then strives to lower their environmental impacts or that reaches carbon neutrality. If a company cannot reduce its carbon footprint, there are various financial tools to trade its emission surpluses with companies that have carbon credit to spare. Most importantly companies need at least to establish an internal environmental baseline to better understand their climate footprint and take action towards greater decarbonization and potential climate adaptation.
Social
Businesses that can produce everything they need, distribute it and then sell it are rare. In most cases, companies need to interact with the communities they serve building relationships internally and externally. Be it with other businesses, suppliers, or the public, the social traits of a company do dictate its market penetration. Even the largest businesses have to cooperate with communities striving to provide positive social externalities for all. The better these companies engage with the public, and with civil society groups, the more likely they are to understand their consumer and fit well within the whole world. Furthemore, job creation and training among vulnerable groups should be prioritized in order to create shared prosperity.
Governance
Very successful companies must have reliable, inclusive and innovative leaders. The leaders of a brand set directives and examples for employees to follow. The vision these leaders hold onto gives us a look into the mentality of the entire businesses they run. The leadership style that a company relies on, likewise, gives you insight into their likely success. Assessing governance is how one can measure the direction that a company is headed. That direction is a result of good vision and that should ensure that gender balanced, ethnic diversity and compensation are streamlined across the different board roles.
Striking the Right Balance
The right balance within your assessment of ESG is ultimately based on your investment goals and business model. There are, however, fundamental societal standards that need to be met (which ultimately will become mandatory), but by measuring businesses performance with ESG in mind, you will build a strong foundation.
