What is Environmental, Social, and Governance (ESG)?

ESG stands for Environmental, Social & Governance. It is a framework that helps the stakeholders to understand and analyse organisations from a broader perspective. Instead of solely focusing on capital gains, stakeholders now like to focus on various aspects of an organisation like how they treat their employees, their commitment to environmental sustainability, and their governance structures. The increasing awareness of these factors highlights how businesses now have more responsibilities beyond just being profit-making machines. 

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History Of ESG:

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The concept of ESG was first brought up in the mid-2000s, it was mentioned in a United Nations report called ‘Who Cares Wins’. Although we consider that as the first mention, if we go back in time, we can see that we were always focusing on the S and G factors of ESG from mid 20th century, be it raising voices to give equal opportunities, fair wages, sustainable working places to the employees or taking decisions that not only benefit the organisation but the surroundings along the lines. These factors were always focused on and worked upon in the past as for the E i.e. the environmental factor we started focusing on it in the late 20th century when the concerns regarding melting glaciers, changing climate, and increasing heat on the planet rose so did the environmental responsibilities of the organisations. 

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Environmental Pillar Of ESG:

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The environmental pillar of the ESG covers all the aspects and activities of an organisation that can or may affect the environment. Actions such as greenhouse emissions, and water and ground pollution are key factors considered in the environmental pillar. Companies are increasingly under investigation for their carbon footprint, waste management practices, and resource consumption. As climate change becomes an important global issue, stakeholders demand more transparency and accountability from businesses regarding their environmental impact.

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In response, organizations should implement eco-friendly practices, such as reducing energy consumption, adopting renewable energy sources, and adopting sustainable practices in day-to-day operations. Additionally, companies can invest in technologies and innovations aimed at minimizing their environmental footprint while maximizing efficiency and profitability.

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Social Pillar Of ESG:

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The social pillar of ESG includes how a company interacts with its employees, customers, suppliers, and communities. It emphasizes on promoting diversity and equality in the workforce, ensuring fair labour practices, and maintaining positive relationships with local communities.

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Companies are expected to prioritize employee well-being, provide safe working conditions to them, and offer opportunities for professional as well as personal development. Stakeholders pay close attention to issues such as labour practices, human rights and fair pay. 

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Governance Pillar Of ESG:

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The governance pillar of ESG refers to the systems and processes that help in decision-making in an organization. This includes aspects such as corporate governance structure, board composition, executive compensation, and risk management practices.

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Strong governance practices ensure transparency and accountability within an organization. Companies with strong governance frameworks are well prepared to mitigate risks, prevent conflicts of interest, and ensure compliance with laws and regulations.

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Materiality In ESG

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Materiality in ESG reporting plays a crucial role in guiding organizations to focus on the most relevant sustainability issues. It recognizes that each industry has its own priorities and challenges, which require tailored approaches to ESG initiatives.

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Understanding materiality involves identifying the environmental, social, and governance issues that have the greatest potential to impact a company's financial performance.

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For example, In the retail industry, ESG considerations may be different than other sectors like energy or finance. For example, while greenhouse gas emissions might not be as significant for a retail company as they are for an energy company, issues related to supply chain ethics and labour practices can be a priority. These differences in what matters to a particular sector from an ESG perspective are called materiality. 

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Companies generally report on the issues that are material to them. Generally, materiality is considered based on what ESG issue is supposed to be financially material in a given industry. Financially material issues are those that can impact a company's financial performance for example, for a retail company, ensuring fair labour practices within its supply chain, such as fair wages, safe working conditions, and the absence of child labour, product sourcing, including the use of sustainable materials and responsible sourcing practices, could be considered Financially material issues. 

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Understanding the material ESG issues helps companies do better in ESG, lower risks, and gain trust from stakeholders.

By considering what's important, companies can:

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• Match their sustainability plans with their business and what stakeholders want.
• Concentrate on the most important sustainability problems and give enough resources to solve them.
• Improve how they communicate to earn trust and show they're clear with stakeholders.
• Prove they're leading and serious about sustainability and ESG.
• Do better in ESG and sharing information.

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Stakeholder engagement is key to determining materiality, as it allows companies to gather insights from investors, customers, employees, and the community. This process helps organizations prioritize issues that are most relevant to their stakeholders and identify opportunities for positive impact.

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Different frameworks, such as the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB), offer approaches to defining materiality in ESG reporting. While these frameworks may vary in their emphasis, they all underscore the importance of considering both stakeholder perspectives and financial implications when assessing materiality.

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How Can Koshish Support Your ESG Planning?

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At Koshish, our skilled team, including multiple experts from IIT Delhi with over 15 years of experience, provides organisations with overall ESG consultancy services which include ESG reporting, ESG assessment, ESG strategizing services carbon accounting and GHG emission calculation services. If you're uncertain about ESG reporting, we offer guidance to help you align your efforts towards sustainability with the expectations of stakeholders. Reach out to us for guidance!