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What is ESG?

The simple answer is: Environment, Social and Governance... but that doesn't really help.

ESG means different things to different people and organisations. For some it is synonymous with Sustainability. For others it only refers to a metric used by finance experts when trying to compare opportunities. Whether ESG is the primary mechanism through which to get the complex world of people and planet into a discussion, or the route to green-washing, it is still a three letter acronym that we need to understand.

  1. ESG comes as a package, not as three individual silos.

While many organisations approach ESG by breaking it down into its component pieces, the beauty comes in the interconnectedness of the components and their dependency on one another. Environment can be fairly easy to define (anything regarding the natural world), many aspects overlap with those deemed to be vital within Social (e.g. "water"). Governance makes everything hang together and gives us personal accountability to take action and make sure that where we say we will have impact, we are indeed creating that impact. Figure 1 illustrates some of the key areas of overlap between E, S and G of typical themes and drivers.

Fig. 1: Typical ESG themes and drivers, and their categorisation into E, S or G. Note the regular overlaps.

2. The forest of ESG standards, principles, guidelines

Thankfully, the world's policy makers and standard writers have started to consolidate the forest that is the world of ESG standards, principles and guidelines. While it is still tempting for organisations to suggest their own, very special, new standard, it will ultimately say the same sort of thing as many of the others already out there. Figure 2 explores some example standards, frameworks and guidelines as my have to be adhered to a hypothetical global mining company.

Fig. 2 Example ESG standards, frameworks, principles as may be required of a global mining company.

3. Terminology - lost in translation.

Once you have got your head around the forest of standards, the next problem is that the terminology used within these standards often conflicts with one another. This is often a function of ESG being the confluence of many different disciplines who have all used the same sort of tools, but developed their own nomenclature to go with it. For example, just taking the terms used in conjunction with risk management in ESG, a world of confusion can unfold. Figure 3 attempts to explain some of the more confusing aspects.

Fig. 3. Explaining some of the ESG risk management terminology.

4. Empathy - double materiality.

One of the underlying sources of confusion is the mindset and direction from which different teams and individuals feel risk flows. The traditional approach for finance focused teams is "how might the world impact on me?", however for social experts, the traditional approach has been the opposite and "how might I affect the world?". In order to get ESG to work and to truly fit into a business, we need to expand our own universes and incorporate both directions of travel. We also acknowledge that the world is constantly changing... and is therefore dynamic (see Figure 4).

Fig. 4. Dynamic double materiality with the flow of impact between the internal and external context.

5. Timescales - planning for beyond tomorrow.

Depending on the industry, strategic planning may extend 30 years or more into the future. This is fantastic for ESG, as often the risks themselves will not reach their material level of impact for decades. The key however is not to wait for this to happen... but instead to work out when controls need to be put in place so that the risks are proactively managed (and the risk managers are not proven correct!). The majority of organisations are far better at planning for tomorrow rather than the far distant future, as it is generally more certain. ESG is full of uncertainty however and so relies on leaders being comfortable with putting place controls now that will manage risks that may only happen decades into the future.

Figure 5 outlines some of the timelines we need to be aware of.

Fig. 5 Risk timelines - when might the risk have true impact? Note - the real question is when do we need to manage it (often many years in advance).

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