Company NewsJuly 24, 2023

What is ESG? (Environmental Social Governance)

ESG is widely considered a top business priority and almost 50,000 companies in the EU must now report on it. Here’s what we mean by the ‘environmental, social and governance’ performance of a company and why it matters.
Avatar Rebecca Lambert

From ESG and CSR to socially responsible investing (SRI) and the SDGs – there’s an abundance of sustainability related acronyms being bandied around today, and for good reason.

But… how many of these terms do you really understand? In this article, we’ll tackle the topic of the ESG movement and look at why in recent years it’s a top priority in the business world and what it means for your company.

So, what does ESG stand for? Environmental, social and governance. In short, it’s a way of measuring companies’ performance in these three areas. The World Economic Forum defines ESG as the following:

“Understanding ESG in a capitalist context is simple. It is the consideration of extra-financial information to enable better decisions that, if done properly, should lead to sustainable economic growth.”

For businesses, then, ESG standards are a way of quantifying the impact they have on society and the planet, putting in place a governance framework to support their ESG-related activities and sharing that information with investors and customers to help guide their purchasing decisions.

ESG 101

ESG and similar sustainable and socially responsible driven investment strategies aren’t a brand new idea. Most would agree the term was coined in the early 2000s by the United Nations in a report called “Who Cares Wins,” in which it set out recommendations for integrating ESG principles into financial-related activities.

Nearly two decades on, ESG considerations are firmly established in the wider economy as companies across all industries face intensifying pressure to address pressing global issues, including climate change, environmental degradation, inequality, making the transition to a circular economy, and more.

How can ESG programs contribute to sustainable economic growth?

Regulators, investors, consumers and employees increasingly expect companies to report on their ESG data.

In a PwC survey, global investors placed ESG-related outcomes, such as corporate governance and carbon emission reductions, among their top five priorities for businesses to deliver. Nine out of ten asset managers choose to integrate ESG standards into their investment strategy to improve overall returns. And as of 2023, a mandate from the European Commission known as CSRD1 means that almost 50,000 companies in the EU must now report on ESG criteria.

ESG criteria - what is ESG - Dassault Systemes

As Deloitte explained: “The goal of ESG is to capture all the non-financial risks and opportunities inherent to a company’s day to day activities.” This transparency is designed to hold businesses accountable for all aspects of their end-to-end value chain and the ecosystems they’re part of, covering the following three pillars to achieve sustainable economic growth:

  • The environment, such as carbon emissions; air, water and ground pollution; use of plastics, virgin and recycled materials; waste and end of lifecycle management; deforestation; water use
  • Society, covering employee and labor policies; working conditions; health and safety standards; sourcing; product safety and quality
  • Corporate governance related to a business’s purpose; shareholder rights and responsibilities; board diversity, executive compensation; anti-corruption practices.  

“It’s becoming imperative for companies to be able to articulate their ESG strategy and actions, and it is just as important for investors to understand how well a company is prepared for future risks and opportunities to support their own decision-making,” Susan Gray, global head of sustainable finance business and innovation at S&P Global, told Environmental Finance.

By 2026, according to PwC, ESG-related assets are expected to “more than double” in the US to reach US$10.5 trillion. In the same timeframe, they’re estimated to rise by 53% in Europe to US$19.6 trillion, and triple in the Asia-Pacific region to US$3.3 trillion.

Companies use ESG reporting metrics to guide their own decision-making. Armed with this information, they can develop more resilient business strategies, and better prepare themselves for future ESG-related risks. They tend to outperform the broad market, too. Research widely points to a direct correlation between stronger ESG standards and financial success. One report found that over the past five years, stock funds across global markets outperformed if they were weighted toward companies with positive ESG scores.

“In the long run, as climate change increasingly affects value preservation and the ability to deliver sustained profits, the total accumulated value of not investing in ESG will be significantly lower than a successful ESG approach,” warned PwC.

Why is the ESG agenda controversial? 

Despite the perceived value of ESG, in recent years it’s become a subject of doubt and criticism. Some say that ESG is purely a box ticking exercise to appease customers and investors, contributing to the rise of so-called “greenwashing.”

In the wake of war, climate-related disasters and inflation, it’s become clear that supply chains remain vulnerable, which, in turn, has impacted investors’ thinking. The World Economic Forum pointed out that some detractors claim that ESG “must implicitly mean sacrificing some performance upside,” yet there is little evidence to suggest this is the case. Perhaps a bigger issue is the disparity between how companies measure their ESG performance, so that it’s difficult to make direct comparisons.

Globally aligned ESG standards and frameworks aim to address this

One such example is the International Sustainability Standards Board (ISSB), established at the COP26 climate conference in Glasgow. ISSB’s proposed standards on sustainability and climate-related disclosure requirements aim to create high-quality, globally comparable sustainability information for the capital markets, telling companies what information to disclose, and where and how to disclose it.

“[Even] if the rules on what is ‘good’ are different, you would still have very comparable factual reporting that could lead to comparisons between, let’s say, a German company and an Argentinian company,” said Nadja Picard, partner and global reporting leader at PwC, Germany.

How can Dassault Systèmes help to achieve ESG goals?

Widely recognized for its own ESG credentials – placing in the top 1% of rated software companies in the Dow Jones Sustainability Index – Dassault Systèmes in recent years has made an ongoing commitment to our ESG principles.

“ESG reporting is a key area of focus for Dassault Systèmes,” said Florence Verzelen, our executive vice president of Industry, Marketing and Sustainability. “We recognize its importance for our ambition to become the trusted and leading partner for reinventing a sustainable economy through our own business practices and human resources, as well as through the virtual twin experiences we enable for more than 300,000 customers in 12 industries worldwide.”

Among other ESG-related initiatives:

Much like a digital transformation journey, we believe that ESG principles are about defining a long-term path to success, while addressing shorter term roadblocks to meet investors’, regulators’ and consumers’ expectations en route. By working together, we can succeed in harmonizing product, nature and life, and building a truly sustainable planet.

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