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Monday, January 30, 2023

Understanding ESG

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ESG refers to a framework designed for stakeholders including investors, customers, suppliers and employees to assess how sustainable an organisation is in terms of managing risks and opportunities in connection with environmental, social and governance factors.

Unlike its predecessors – Environmental, Health and Safety in the 1980s, Corporate Sustainability in the 1990s and Corporate Social Responsibility in the 2000s – ESG, which has been in existence since the 2010s, is seen as a more proactive approach for organisations to grow.

Taking account of a more comprehensive view that sustainability involves more than just the environment, the framework is becoming more important than ever in today’s increasingly volatile world.

For investors, ESG considerations are vital in screening potential investments; globally, ESG-focused companies tend to perform better financially compare to their counterparts. 

Three-year performance comparison between companies listed in the ESG-focused FTSE4Good Bursa Malaysia Index and the conventional FTSE Bursa Malaysia EMAS Index. Image from FTSE4Good Bursa Malaysia Index Factsheet by FTSE Russell

For governments, emphasising ESG in businesses and even the public service strengthens their capability and drives efforts in tackling economic, environmental and social issues affecting their nations.

In turn, society will be positively impacted from whatever fundamental change that takes place as a result of ESG initiatives by governments and the private sector; simultaneously continuing to push them to be more accountable and transparent in ensuring sustainability.

When screening potential ESG investments, investors usually refer to ESG ratings such as FTSE Russell’s ESG Ratings (above is its ratings and data model), Sustainalytics’ ESG Risk Ratings and RobecoSAM Corporate Sustainability Assessment (which administers the Dow Jones Sustainability Index). Image from FTSE Russell’s ESG Ratings Product Overview.

More importantly, organisations – be they multinational corporations or micro, small and medium-sized enterprises – that incorporate ESG in their strategies and operations will thrive in the long run, albeit costly and time-consuming to take on initially.

In an article published in the McKinsey Quarterly November 2019 issue, strong ESG propositions can create or add value to a business, thereby enhancing cash flow in five different ways:

  • Facilitating top-line growth by way of, among others, tapping new market bases, expanding into existing ones, and driving consumer preference
  • Reducing costs, such as those related to operations, supply chain and human resources
  • Minimising regulatory and legal interventions due to greater transparency, potentially leading to rising support from government
  • Increasing employee productivity and satisfaction, as well as attracting and retaining quality employees more effectively
  • Optimising investment and capital expenditure towards more promising and sustainable opportunities

ESG and Technology

Achieving these ESG initiatives will require the use of technology.

A May 2022 research report by Accenture cited technology as essential for organisations not only in reaching their sustainability targets, but also in tackling said technology’s impact towards the environment and society.

“Technology is key to solving the world’s most daunting challenges, but it must be used in a way that helps maximise the benefits while minimising its harmful side-effects,” it noted.

For organisations to ensure success in their sustainable technology strategy, the report outlined three major elements: sustainability by technology, sustainability in technology, and sustainability at scale (Table 1).

ElementsDescription
Sustainability by technologyUtilising technology innovation to drive sustainability. Of vital matters to address include: Transitioning to net zeroEmbracing responsible value chainsProviding sustainable choices for customersMeasuring and reporting ESG activitiesBuilding sustainable organisations
Sustainability in technologyUsing technology to provide solutions without contributing to a problem. Areas to consider include: Net zero: Green software practices can reduce energy consumptionTrust: Build systems that protect privacy and are fair, transparent, robust and accessibleGovernance: Make ESG the focus of technology, not an afterthought
Sustainability at scaleTransitioning to a more holistic approach that allows collaborations with stakeholders to set off progress beyond the organisation. This can be done by: Fast-tracking alignment with the UNSDGsAccelerating innovation through working beyond the boundaries of one companyFostering standardisation, bringing in regulations and building awarenessJoining industry collaborations, alliances and advocacy groups focused on eco-friendly technology

Table 1: Key elements to a successful sustainable technology strategy. Adapted from https://www.accenture.com/sk-en/insights/technology/uniting-technology-sustainability

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