Investors always want to invest in companies with considerable price upside and long term business growth prospects, while safeguarding their capital from substantial downside risks. ESG is emerging as a significant contingent risk as well as business opportunity. There are abundant examples of companies losing their stock market lustre due to poor management of ESG risks, cases in point being Boeing and Volkswagen. Similarly there are examples of outperformance when ESG opportunities are monetize, for example Tesla.
Hence for safeguarding their capital as well as for identifying alpha need to identify and assess performance on relevant ESG risks and opportunities.
Table of Contents
What are the essential ESG Metrics?
Each letter of ESG acronym stands for a distinct form of risk that might affect how a company impacts the environment and affects its customers, employees, regulators, and society. While all ESG risk and performance metrics are crucial, some can be called essential for almost all companies, viz:
An organization’s air pollution, greenhouse gas emissions, waste output and its use of scarce natural resources and energy efficiency are essential environmental factors.
Company’s health and safety, work environment, data security/privacy, product and consumer responsibility as well as contribution to community development are essential social metrics.
These elements influence how government choices, regulation compliance, and corporate power structures impact a firm. Examples of relevant standard ESG metrics include things like statistics on the ethnicity and gender of the organization’s top executives.
Important ESG Metrics for Businesses
Reduction in Environmental Footprint
The carbon footprint of a corporation is a critical ESG metric. Reduced carbon emissions can help delay climate change and protect the environment. Hence company’s are expected to report not only their caron emissions but also initiatives underway to reduce emissions and targets taken by the company that will enable them to reduce emissions to Zero over time. The Environmental impact though air emissions, materials used and water consumed also needs to be disclosed in the same framework adopted for carbon disclosures. As well as information about ESG more important for investors and companies.
Corporates at all points have to balance conflicting priorities and make choices that can either provide short-term returns or long term sustainable growth. These decisions have to be taken for all new investments, expansion, executive compensation, exploration of new markets and launch of new products. Hence the governance framework of the organization is a critical disclosure.
Positive social impact
Healthy, safe, and happy workers are essential for a company’s long-term success. Making improvements to the health and safety of your employees will lead to fewer workplace accidents, decreased employee turnover, and more productivity. Data safety and security, community development, consumer safety and product responsibility.
Investors are increasingly evaluating firms based on their standard ESG metrics performance when making investment decisions. In fact, by 2025, 50% of all manage assets in the United States will be ESG-mandate. Hence companies need to increase their disclosures on critical metrics immediately and over time cover other ESG metrics.