ESG? What’s that about?
Today wherever you go, whatever you read, there is a constant mention of ESG. And since its one of the most important topics when it comes to ACCA students, we felt its better we cover it here. So what’ ESG? ESG stands for Environment, Social and Governance. Let’s start with why we need to understand environment.
Environment has been a hot topic for business for decades now. However in the recent times individual customers are also becoming conscious about what the businesses are doing with the environment. And the environment is no longer issue for businesses that apparently were the environment destroyers but also ones who have little or no impact. So lets say a technology company that supports business reduce their IT spend significantly while allowing their customers to work from anywhere in the world thereby reducing the waste of resources like teams having to travel to office, use of office electricity etc. However the same company can’t just get away saying that because they personally don’t have a negative impact on the environment they don’t have to worry about it. Therefore the same company would regularly do tree plantation drives, recycle and reuse drives, renewable energy use, etc. Now there are many companies that are doing this, Infosys, TCS, Wipro to name a few. Why are they doing this, its because their customers/clients will only do business with them or anyone else only if they are environment friendly. There are standards like ISO 14000 which talks about how companies can become more environment friendly.
The next is Social. Very much in line with how the environment is becoming a big thing for businesses, the businesses impact on society and what do they about it is becoming very important. Lets say business today opens a new factory right in the middle of the city, this creates crazy traffic, pollution, green patch that was there before to be cut down etc. Therefore lots of negative impact on the society as a whole, do you think you as a customer want to buy anything from this type of business. The customers are becoming more and more aware of the who they purchase from, and with consumerism on the rise, businesses can no longer take the society as granted.
The last in the ESG is Governance. The governance is largely to do with how the companies are run and managed. In the early 90’s there was a growing trend of companies going bankrupt while the senior executives continued to take huge salaries and bonuses. One such example is of Enron, a major power company in the US, a billion dollar Company, which overnight ran into ground as soon as a whistle blower blew the lid on accounting fraud and window dressing. And Enron is not the only one, globally there have been such instances of frauds committed by senior executives including our very own Satyam Computers which almost got shut down because of the fraud committed by the founder Ramalinga Raju. To avoid this Corporate Governance code has been brought into place which gives guidance on company’s leadership, executive pay, audits, internal controls, and shareholder rights.
So like you can see the ESG has very good reasons why become and continues grow in popularity? It will be now up to the companies to make sure that these ESG practices don’t merely become a tick in the box, but a way of how companies are run.
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