Blog.

ESG criteria: a guide to ethical behavior for companies

Blog
14 November 2022
ESG criteria: a guide to ethical behavior for companies

The magnifying glass with which organizations are scrutinized is getting sharper and sharper. Even the smallest fault can put them in the spotlight. Protests against them are only intensifying, a phenomenon promoted by the expansion of social networks. In a scenario where it is becoming increasingly difficult to stay afloat, companies should incorporate ESG criteria into their processes.

The rise of socially responsible investment has gradually introduced ESG criteria into the business landscape. Fifty years ago, however, the situation was far from what it is today.

Although there have always been environmentally conscious businesses doing their bit, most of their efforts were focused on a specific area. As a result, companies generally lacked an integrated approach. Gradually, however, ethical investment gained ground, until today, when all firms accept it.

During its evolution, two steps were taken at the institutional level, giving it a substantial boost. First, in 2005, the UN published its Principles for Responsible Investment, a clear sign of the interest of the highest levels in these issues. Nine years later, in 2014, the European Union amended legislation and began to require that reports prepared by organizations include ESG criteria.

But what do ESG criteria consist of, and why have they become indispensable for any company wishing to ensure its survival?

What are ESG criteria?

A strategy based on ESG criteria involves paying particular attention to the impact of the decisions made by a company at the environmental, social and governance levels. This is a group perspective: the firm must take responsible action in all areas. The three are part of a whole; it is not possible to perform formidable management in one and neglect the others.

To succeed in this task, it is vital to carry out a very deep exercise of self-criticism. The organization must ask itself a host of questions and answer them honestly to check its performance in these areas.

An approach inspired by ESG criteria also provides you with guidelines that you can put into practice if you want to be more ethical. This, in turn, will enable you to attract more investors or customers, as sustainability is nowadays a highly valued asset for all players in the business system.

Whereas in the past, businesses had almost carte blanche to engage in all harmful or damaging activities, now the slightest failure can have far-reaching repercussions. Adopting ESG criteria is, therefore, a great help in preventing potential risks. If a company performs excellently in all three areas, the likelihood of facing a crisis due to its own actions is greatly reduced.

The environmental aspect

The first aspect when implementing a strategy based on ESG criteria is the environmental aspect. This field refers to all the measures put in place by the company to take care of its environment. It also studies the impact of its activities on the environment. For example, if your processes are polluting, you are not doing well.

Some of the most outstanding examples of good environmental practices are the use of renewable energies, the commitment to energy efficiency, waste recycling, opposition to animal testing, the use of scarce resources and the reduction of pollution and carbon footprint.

Firms that implement these activities will contribute positively to caring for the environment and reducing the negative impacts that their activities could cause.

In addition, organizations can further deepen and redouble their commitment in other ways. In this sense, aligning with their sector brings a great deal of coherence to their discourse. For example, a company that manufactures paper could collaborate with associations dedicated to planting trees, and a cruise company could financially support small initiatives that strive to clean up the oceans.

ESG criteria: a guide to ethical behavior for companies

The social aspect

When a firm is acquiring an approach based on ESG criteria, the second area to consider is the social aspect. This aspect includes all the actions taken by the organization to support the members of its communities and refers to the impacts caused by its activity on society.

All actions undertaken by companies to promote literacy, culture, education, health, human rights or equal opportunities fall under this social aspect.

In addition, initiatives that strive to positively transform society and improve citizens' quality of life can also be financed. Some companies take this commitment further and create their foundations or campaigns to make this a reality.

Again, it is possible to do this in line with your business. For example, a company in the healthcare sector may support projects that promote the vaccination of children in developing countries, and a soft drinks business may build wells in places where access to clean water is not easy.

The good governance aspect

The last of the fields to be considered for good management of ESG criteria is good governance, the organisation's management in a correct and accountable manner. But what does this mean?

Companies characterized by good governance do not abuse a hierarchical structure, listen to the voice of all their employees, provide communication channels for their stakeholders and encourage equality and diversity in their workforce. They also comply with legal regulations, defend the interests of their shareholders, are committed to transparency, seek customer satisfaction, strive for the quality of their products and services and ensure the efficiency of their processes.

While the two previous sections mainly concern the external face of the firm and its repercussions in the world, the section on good governance refers to its internal face. However, when a person interacts with a company, they can sense whether it does a good job and rate it positively.

ESG criteria and ethical investment

All companies that fall into the category of ethical organizations manage these three areas well. At the same time, they do not neglect their profitability. Economic profit is not incompatible with environmental or social benefit. Quite the contrary. Combined in the right way, the three are mutually reinforcing.

Firms are now evaluated from all three perspectives, rather than solely from an economic perspective. This results in a more rigorous and reliable assessment

Being considered an ethical company has a multitude of benefits. To begin with, it is a very effective source of revenue. There is a very large segment of customers and investors interested in collaborating with sustainable projects, which directly impacts their profits.

For this reason, a large number of companies are joining this trend. They are not only studying and trying to improve the impact of their activities, but are also looking for ways to generate wealth for society and the planet.

Although ESG criteria are a very useful guide to ethical investing, the umbrella that covers this discipline is much broader. This form of financing also encourages investors to consider the best-in-class system, to be guided by international treaties, to exclude organizations with negative activities and to apply methods such as thematic or impact investing.

In short, ESG criteria are a reliable compass for turning firms into ethical and responsible companies. And they are immensely useful for all those who wish to contribute to creating a better world. A mission in which the role of companies and alternative investment platforms cannot be overlooked.

companies ESG criteria ethical investing
Inversa Team
Inversa Team

If you would like to contribute to Inversa's Blog as an expert, become a knowledge partner.

Sign in