International: The E in ESG - Part one
The Environmental, Social, and Governance ('ESG') factors function as a general framework to measure, monitor, and assess how private and public bodies incorporate environmental and social considerations into their business functions. The Environmental ('E') in ESG, however, deals more specifically with the interaction with natural resources and spaces, as well as the impact on the environment, both in direct corporate operations and across supply chains. This Insight article constitutes part one of a three-part series on ESG and summarises the key-issues related to the E in ESG, with part two shedding light on the Social ('S') and part three considering Governance ('G').
Rather than a separate, disjointed sphere or only in the aftermath of a natural disaster, the idea of thinking about the environment as an integral part of the economy gained importance over the last decades. At this point, it would be inconceivable to reflect upon economic growth without including considerations about climate risks, water, temperatures, and carbon emissions, to just name a few. The significance and urgency of these challenges contained within the E component bear a heavy weight on assessing current corporate agendas and thinking about (more) sustainable avenues.
What falls under the E?
The E encompasses a broad variety of factors connected to the natural world, which are condensed into measurable parameters to help understand environmental risks and ways to mitigate them. More specifically, the first ESG pillar covers concepts around climate change mitigation and adaptation, as well as the environment more broadly, including the preservation of biodiversity, pollution prevention, water use, and circular economy.
Why does the E matter?
From a practical perspective, the E within ESG matters to the public, employers and employees alike, as well as investors on the assessment of an entity's perspective vis-à-vis environmental challenges and sustainability. The E becomes a pivotal point in holding public and private bodies accountable to their own and global commitments across the different E-performance areas.
Zooming out and thinking more critically about its global implications, the E component is crucial in international commitments, both regulatory and voluntary, on climate and sustainability to build and foster a climate-neutral, resilient, resource-efficient, and fair economy. Thereby, the E goes hand in hand with more theoretical questions on environmental justice, fractures along the Global North-Global South divide, and material exploitation.
What are the current issues at stake and challenges going forward?
Proactive and innovative approaches to the E
Without an adequate strategy which values the environment in its own right rather than a mere add-on, a prepared attitude to anticipate environmental disruptions, and robust mitigation procedures in place, public and private bodies can face sanctions, prosecution, and reputational damage, which can in turn lead to detrimental consequences on the shareholder value. In particular, reputational damage can occur when companies neglect environmental considerations or when they contribute to, or even initiate, environmentally detrimental operations.
On the flipside, entities that promote environmental goals as a key-part to their business ventures and invest in research and development concerning energy sources and efficiency, re- and up-cycling strategies, as well as resource management and ESG-friendly technology can benefit from it in terms of brand reputation. Phenomena like 'greenwashing', however, have gained foot in the corporate world, meaning that some corporations manage their reputation with the financial community, regulators, and the public so as to hide negligence of or a negative impact on E-related issues, to obscure the nature of problematic practices, and re-distribute blame, while seeking and/or maintaining a leadership position.1
The spectrum of approaches to the E is vast and expanding with a world evermore connected and future-oriented.
Uncertainty and global approaches to the E
From a legal angle, in the last decades, we could observe the emergence of a regional patchwork system with diverging terminology, benchmarks, indices, and policies defining issues and solutions to environmental risks and threats. The lack of a global response on a regulatory level, rather than solely on a voluntary basis, poses a fundamental challenge to a harmonised and efficiently monitored approach to the E in ESG, although a rise in mandatory reporting can be observed in some countries, as for example in the UK.
Uncertainty and cultural changes
With rising temperatures and resulting imbalances in the ecosystem, natural disasters, like floods, heatwaves, wildfires, and hurricanes, are expected to occur more and more frequently than currently, which creates an atmosphere of uncertainty and danger. In response, an increasing interest in the environment and focus on climate-friendly practices has led to the emergence of a culture of sustainability and environmental awareness, which seems to progressively cut across various layers of organisations and companies, as well as society writ large. The E becomes a standard, value, and commitment – a shift which is also resulting from cultural and societal trends in the perception of the human impact on the earth and ethical questions around responsibility towards our surroundings.
How does E relate to ESG more broadly?
Together with the other two factors, the E sets out a risk-based approach to actual and potential environmental challenges, particularly focusing on problem-solving, mitigation, and prevention strategies. Thereby, the E slots into ESG in that E-related initiatives raise awareness on the detrimental interactions between the human and nature, while also promoting environmentally friendly solutions. As the S and the G, the E does not have a specific timeframe; instead, it operates across the short, middle, and long term.
The ESG components converge into the goal of sustainable finance which promotes economic growth, whilst also taking into account the environment, social, and governance aspects. Further, the concept of transparency serves as a basis to assess risks and mitigate them through an adequate governance of corporate and financial actors.2
In summary, this Insight article only scratches the surface of an array of issues, challenges, and solutions related to the 'Environmental' component of ESG. The management of environmental factors has become an essential factor in promoting a public or private body's agenda which values and acknowledges ESG. The E and all it stands for is no longer an afterthought, but a driving factor when strategising, planning, and making environmentally ethical decisions.
Marianna Patat Editor
1. See: Laufer, W.S. Social Accountability and Corporate Greenwashing. Journal of Business Ethics 43, 253–261 (2003). https://doi.org/10.1023/A:1022962719299
2. See: https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/overview-sustainable-finance_en