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Demystifying ESG

ESG or environmental, social, and governance is a novel concept for many. But the truth is, it’s just as old as it is new.

When one thinks of ESG or sustainability, greenhouse gases (GHG) or carbon emissions, climate change, circular economy, energy transition, diversity and inclusion, and sustainability reporting come to mind.

While these may be new areas that companies are exploring, there are other aspects of ESG that most companies already have in place.

ENVIRONMENTIn terms of the environment, there are already laws that highlight our responsibility to ensure clean air and water, take care of natural resources and practice proper waste management. Recently, laws were instituted to promote conservation of energy as well as the recovery of plastic waste that harms our environment, oceans and marine life and leads to societal and health problems. Complying with these laws and regulations falls under a number of environmental aspects of ESG.

SOCIALAs the first country to industrialize, the UK established regulations against child labor and laws that addressed poor working conditions for workers in the late 18th century. In the Philippines, our labor laws and regulations champion the welfare of workers. The protection of workers and the promotion of secure tenure, humane working conditions, and equal work opportunities for all are at the very heart of our constitution.

Again, if a company has policies and practices that adhere to these regulations, then the social aspect of ESG is already partially satisfied.

GOVERNANCELaws and regulations require companies to practice good governance, conduct businesses in an ethical manner, protect data security, report reliable financial statements, pay the correct taxes and the like.

If entities have a governance structure and policies that take care of these, then they are on the right track in terms of ESG.

EVOLVING ESG REQUIREMENTS AND PRACTICESIn most cases, ESG simply brings to the forefront the basic practices, policies, and processes that organizations should have in place but may have forgotten as they prioritize their bottom line.

But ESG is also more than that.

ESG requirements are constantly evolving. For example, a strong ESG practice would propel a company to assess its GHG or carbon emissions and identify ways to reduce them. These gases contribute to climate change, which has a significant impact on typhoon-prone countries like the Philippines. Companies are also encouraged to promote workplace diversity, highlighting equal and fair opportunities for all, as well as respect for the dignity of each person.

ESG policies would also suggest that companies should encourage their suppliers to comply with laws and regulations by checking on their practices before engaging with them. In addition, certain companies are now required to report on their ESG performance under global sustainability standards, much like financial statements are required to adhere to internationally accepted accounting and financial reporting standards.

CREATING VALUE THROUGH ESGA good ESG strategy is not solely a matter of implementing any or all of these initiatives. Similar to a business strategy, it has to fit into the company’s vision and mission, purpose, business model and industry environment. It has to address the requirements of its stakeholders and respond to issues that are relevant to them.

Some may see implementing ESG strategies as an additional cost in terms of resources, effort and time. These are some of the roadblocks to adopting ESG or more sustainable practices. However, this kind of mindset overlooks an important part of the equation — the benefits.

ESG can create value not only for the stakeholders but also for the company.

Consumer preferences have begun to change; more customers are now conscious about the products they buy, favoring companies that do the right thing. As such, a company that acts “responsibly” can enhance brand, increase customer loyalty, and reach out to new markets and customers. This leads to increased market share, which translates to higher revenue.

More efficient use of resources arising from ESG objectives can lead to cost savings for the company. For instance, energy saving devices, policies and practices not only reduce GHG emissions but also utility costs. Moreover, switching to renewable energy power for a facility’s use can also save millions of pesos annually.

Initiatives that promote the welfare and well-being of employees improve employee retention and engagement. This could save companies hiring and retention costs.  Furthermore, employee engagement leads to higher productivity, bringing cost savings, improved services and customer satisfaction.

Leveraging these practices may provide pricing power to companies, resulting in improved margins.

More and more investors and lenders take into account how target companies or borrowers address ESG-related risks and opportunities. Consequently, a good ESG performance can provide businesses with access to capital.

Although ESG may be unknown territory to many, it is not all rocket science. An entity may already have some basic policies and practices in place that it can build on. The important consideration is to create an ESG roadmap that is not only an add-on, but one that is embedded in the company’s business operations.

In conclusion, there are many benefits from adopting ESG practices. ESG does not only nurture the environment, protect the rights of people, promote the welfare of the community and foster good business practices. It can also enhance shareholder value through improved performance. If done right, the improved performance yields lasting positive impacts, leading to a sustainable business and a healthy world.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.

Catherine H. Lipana-Gomez is an ESG and financial services partner at the Deals and Corporate Finance department of Isla Lipana & Co., the Philippine member firm of the PwC network.

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