Blog by Maria Montenegro-Bernardo, Junior Associate
The concept of Environmental Social Governance (ESG), as we know them today, have been evolving for centuries.[1] As early as the 20th century, there were efforts from various campaigns to pressure companies into more “sustainable business practices.”[2] “A 2004 report from the United Nations [delineated] what is widely considered the first mainstream mention of ESG in the modern context.”[3] In the 1990’s, less than 20 publicly traded companies around the world had ESG disclosures in their filings.[4] That number has increased by 83% in 2014, with 6,000 companies filing ESG disclosures.[5]
In ESG, the “E” stands for environmental. It concerns companies’ business activities in relation to their effect on the environment and any actions they take in minimizing harmful environmental impact they may cause.[6] Environmental issues can include “carbon emissions, climate change vulnerability, biodiversity and land use, toxic emissions and waste, water sourcing and packing material and waste, and electronic waste” among other things.[7] The “S” stands for social. It relates to how companies treat their employees as it pertains to equity and justice, work conditions, and organizational diversity.[8] Social topics can include “labor management, worker safety training, supply chain labor standards, product safety and quality, and consumer financial protection” among other things.[9] “G” stands for governance. It points to “how the firms’ management leads and oversees their organizational authority.”[10] Governance issues can include, composition of the board pertaining to diversity and independence, executive compensation, accounting practices, business ethics, and tax transparency.[11]
ESG reporting is a company’s “disclosure of environmental, social, and corporate governance data.”[12] These three factors are seen as risks for investors, while also affect how or if a consumer will spend their money in a company.[13] Thus, the purpose of ESG reporting is to allow others to understand a company’s performance in specific fields while also providing investors with a clear understanding of the activity of their investments.[14] Additionally, it prevents dishonesty in companies who may be purporting to have an environmental or social presence but truthfully are just “greenwashing” or advertising empty promises.[15]
[1] Dan Byrne, What Is The History Of ESG?, Corporate Governance Institute, https://www.thecorporategovernanceinstitute.com/insights/lexicon/what-is-the-history-of-esg/ (last visited Oct. 7, 2003).
[2] Id.
[3] Id.
[4] Ethan Rouen, Kunal Sachdeva, & Aaron Yoon, The Evolution of ESG Reports and The Role Of Voluntary Standards (Harvard Bus. School, Working Paper No.23-024, 2022).
[5] Id. at 9.
[6] Michael T. Lee & Ikseon Suh, Understanding the Effects of Environment, Social, And Governance Conduct on Financial Performance: Arguments for a Process and integrated Modelling Approach, 1 Sustainable Tech. & Entrepreneurship 1, 1 (2002), https://www.sciencedirect.com/science/article/pii/S2773032822000049.
[7] Jason Krychiw, ESG Scores: The Good, the Bad, & Why They Matter, Conservice ESG (Feb. 13, 2023), https://esg.conservice.com/esg-scores-why-they-matter/.
[8] Lee & Suh, supra note 6.
[9] Krychiw, supra note 7.
[10] Lee & Suh, supra note 6.
[11] Krychiw, supra note 7.
[12] Fabrizio Tocchini & Grazia Cafagna, The ABC’s of ESG Reporting: What Are ESG And Sustainability Reports, Why Are They Important, and What Do CFOs Need To Know?, Wolters Kluwer (Mar. 9, 2023), https://www.wolterskluwer.com/en/expert-insights/the-abcs-of-esg-reporting#:~:text=What%20is%20ESG%20reporting%3F,organizations%20to%20do%20the%20same.
[13] ESG Reporting 101: What You Need To Know, Workiva, https://www.workiva.com/resources/esg-reporting-101-what-you-need-know (last visited Oct. 10, 2023).
[14] Id.
[15] Id.