Why ESG Matters In 2024: What Investors Should Know

All the current economic indicators suggest that 2024 will present companies and investors with challenging market conditions. Governments and central banks have not convincingly curbed Inflation, despite some claims that it has peaked. The conflict in Ukraine continues, as does the commodity and energy crisis. Weather patterns remain unpredictable and food shortages and associated price increases may worsen. There are real concerns that we are entering a global recession

It’s possible that we’ll see an increasing focus on ESG as investors and clients prioritize companies with a demonstrable commitment to social responsibility and long-term thinking. As the cost of living rises, there may be an increasing public expectation that companies will function as a wider force for good in communities where they operate.


What Does ESG Mean?

The acronym ESG means environmental, social, and corporate governance. It’s a loose term that’s not always well understood and is often confused with the related concept of sustainability. When we’re defining what ESG means, we’re necessarily speaking in broad terms. What ESG means to the CEO of a multinational corporation will (at the very least) be subtly different from what ESG means to a twenty-year-old social activist. 

ESG criteria have been evolving over the last two decades and corporate ESG data increasingly determines investor and client decision-making processes. Corporate ESG scores play a growing role in mergers, acquisitions, and divestments.

A clear understanding of the role of ESG in business and how the 3 Pillars of ESG - environmental, social, and governance - affect commercial viability is essential for board members and executive teams.  


What is ESG?

Environmental, social, and corporate governance is somewhere between a business concept and a social philosophy. The 1990s saw a wider understanding and acceptance that corporate environmental responsibility was an obligation and not an option. The 3 Pillars of ESG evolved out of this paradigm shift during the 2000s. One reason why ESG is so important is that it developed as a response to wider public expectations. 

On a practical level, ESG in business is a process where corporations demonstrate to clients, partners, investors, and other stakeholders that they have environmentally friendly business practices, deliver a positive social impact across the wider community, and practice good governance within their own organization. 


The 3 Pillars of ESG

  1. Environmental 
  2. Social 
  3. Governance


Environmental Aspects of ESG

Climate change - or climate instability - is real, even if the causes and likely outcomes remain disputed. Environmental criteria for ESG cover a range of issues related to climate change; the preservation of natural environments, our immediate quality of life, and sustainability in agriculture and fisheries. 


What are Examples of Environmental ESG?

Corporate environmental reporting may include a company’s measures to achieve a zero carbon footprint, reduce greenhouse gas emissions, and improve energy efficiency. Other relevant criteria can include sustainable water management and contributions to reforestation and reversing biodiversity loss. 


Social Aspects of ESG

The social aspects of ESG relate to a company’s social impact and its influence for good among stakeholders and society as a whole. These include working conditions for employees, community initiatives in areas where the company operates, and its response to wider social problems, crises, and humanitarian issues. 


What are Examples of Social ESG?

Examples of what constitutes social ESG may include a commitment to pay employees a living wage and guarantee not just safe, but optimal working conditions. Companies can demonstrate a commitment to diversity, equity, and inclusion in the workforce and genuine employee engagement. They can also devise an ethical investment policy. 


Governance Aspects of ESG

Of the 3 Pillars of ESG, Governance criteria are probably the easiest for companies to implement. They make immediate sense from a business perspective and are the salient points of ESG in business. Governance covers the high ethical standards and procedures that ESG-compliant companies need to aim for during their routine operations. 


What are Examples of Governance ESG?

Examples of ESG-related governance include a commitment to transparency in the recruitment and decision-making processes, robust anti-bribery and corruption policies, strong consumer protection and privacy policies, effective cybersecurity, managerial and employee accountability, and any other initiative that promotes probity, efficiency, and openness. 


Why is ESG so Important?

There are 3 key reasons why ESG is important. 


  1. ESG is becoming an influencer in the financial decision-making process. Companies that can demonstrate impressive ESG data are potentially at a financial and investment advantage over non-ESG-compliant competitors. Some governments, NGOs, and major clients are already more likely to award contracts to businesses with high ESG scores. Equally, funds and shareholders may view ESG companies more favorably when they buy stocks. 


  1. An active ESG policy is a powerful tool for creating employee engagement and improving morale and job satisfaction. Millennials and Generation Z employees in particular place a value on performing meaningful work and respond well to the idea that their daily efforts have a positive social impact. In a time of quiet quitting and employee disengagement, an ESG policy can be a powerful motivator. 


  1. There is some evidence that ESG-active companies are outperforming their rivals. Following the COVID-19 pandemic, the NYSE and Nasdaq companies with strong ESG commitments bounced back faster than their rivals. It may also be the case that the best companies were simply the first to adopt ESG as a PR strategy and would have made fast recoveries regardless. However, a skillfully implemented ESG policy can result in greater efficiency and savings, as well as higher employee focus and productivity. 


How is ESG Different from Sustainability?

ESG goals and sustainability goals often overlap and are very much fellow travelers. The main way in which ESG is different from sustainability is the breadth of its goals. Rather than trying to determine exactly how ESG differs from sustainability, it's probably easier to view sustainability as a component of a wider ESG policy. 

Sustainability falls under the ESG umbrella whenever sustainable innovations improve water management, reduce carbon footprints, optimize supply chains, reduce the cost of basic necessities for consumers, or recycle waste as part of a circular economy. How ESG does differ from sustainability, is in its emphasis on issues like anti-bribery and corruption policies, or effective cyber security. 


Examples of Companies that are Committed to ESG

These companies are just not committed to ESG goals but are actually leading the charge in their respective fields with genuine commitment and impactful actions.


#1 ICL Group

ICL Group (ICL), a global specialty minerals company and one of the largest fertilizer manufacturers in the world has won top-level recognition for both its commitment to ESG and its successful implementation of ESG-compliant policies and innovations. The ICL business model is built around innovation and problem-solving - with the goal of improving people’s lives. Their sustainable solutions and innovations in the global food, agricultural, and industrial products industries are tailor-made for ESG. 

In turn, the holistic adoption of ESG principles is helping them to develop circular economies, optimize and streamline their operations, and redirect savings into new ventures. They are also building strong grassroots ties with local communities and engaging with their own workforce who receive company support to participate in community projects. 


#2 Exelon

Exelon Corporation (EXC), headquartered in Illinois. This powerhouse utility provider harnesses a diverse mix of energy sources ranging from nuclear to solar power. In their latest ESG report, Exelon proudly claims the title of the number one producer of carbon-neutral electricity in the U.S. But they didn't stop there. In February of 2022, Exelon strategically spun off its power generation and competitive energy business into a new entity called Constellation Energy Corp. This move wasn't just about restructuring; it was a clear signal to investors. According to Exelon's CFO, Joseph Nigro, this reshaping has made the company even more attractive to those who prioritize ESG values. Heavyweight investors like UBS have taken notice, commending Exelon for its streamlined operations and "clean profile." This distinction makes Exelon a beacon for investors seeking companies that are not only excellently managed but also deeply committed to preserving our planet.

#3 Intel Corporation

Intel Corporation (INTC),  is dedicated to attaining net-zero greenhouse gas (GHG) emissions across its worldwide operations by 2040, an impressive achievement in a sector renowned for its high emissions. This is no small feat, considering that manufacturing in the U.S. alone is responsible for nearly 23% of all direct carbon emissions. In 2021, they managed to slash their energy use by a staggering 486 million kilowatt-hours from their baseline. Even more, they cut their GHG emissions by 2% from the year before. By pouring approximately $300 million into making their facilities more energy-efficient, Intel is on a path to saving a total of 4 billion kWh of energy. Intel's dedication to ESG practices and its significant investments in energy conservation demonstrates its determination to combat climate change and contribute to a more sustainable future.

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