ESG Criteria: The Key to Measuring Long-Term Sustainability of Companies
Financial results ceased to be the primary measure for evaluating the performance of organizations a long time ago. After all, a snapshot of a specific moment in a company's life doesn't truly reveal its potential, weaknesses, and strengths. Financial statements are not the only thing that matters. In this regard, since the 1990s, a more ambitious measure has been used to assess corporate performance: ESG criteria, which take into account a company's impact on its environment in various ways as relevant factors for its survival and growth.
E for Environmental
The "E" in ESG stands for "Environmental.This criterion focuses on an organization's impact on the environment, including its energy consumption, the type of energy sources it utilizes, the quality of waste management, levels of greenhouse gas emissions into the atmosphere, conservation of natural resources, water usage, and the nature of materials used. It is a gauge that determines the degree of sustainability of companies, a factor of vital importance for both the planet and a company's image and reputation.
S for Social
Society is demanding more ethical engagement from companies regarding the world. This extends beyond the environment. Companies are also evaluated more favorably or negatively based on their contributions to social well-being, including the degree of diversity and inclusion in their workforce and advertising, labor conditions, social risks arising from their activities, respect for human rights, support for local communities, and their values. All these issues impact how society perceives companies and, consequently, their long-term strength. Investors take this into account.
G for Governance
Lastly, ESG criteria analyze the aspects that define a company's internal management, including the level of transparency of its governance, risk management, accountability, decision-making, control mechanisms, independence of executives, and governance structure. They affect, to a greater or lesser extent, the way an organization operates and, therefore, its performance. Again, both potential partners and investors place more or less trust in a company based on the quality of its governance. It provides an indication of the company's reliability.
The Importance of Optimizing ESG Criteria
As we've seen, ESG criteria are often used to determine the current and future performance of companies regarding potential collaborations or investments. However, opting to optimize these criteria offers many other benefits, such as identifying long-term financial risks like negative environmental impacts or legal issues, enhancing the company's image, cost savings, and access to new business opportunities. In general, an organization usually gains a lot from improving its sustainability, social contributions, and good governance.
These are aspects that any forward-looking contemporary company must incorporate into its practices. Furthermore, more and more national regulations and regulatory frameworks are integrating ESG criteria, meaning their significance for companies will only grow in the coming years and decades. The media, society, and commercial repercussions a company faces for its indifference toward the environment or human rights will also increase. Adapting to these criteria is a challenge, but it's the key to acceptance by consumers, investors, and public authorities.
