Environmental, Social & Governance (ESG) criteria

What do we mean by ESG?

In the modern business environment, customers, employees, partners, investors, banks, and rating agencies have high expectations of companies and require them to be more transparent about the non-financial and non-commercial parameters of their activities.

This is especially true when it comes to three core elements; their impact on the environment, their social practices, and the organisation of their governance. Together these three criteria, known collectively as environmental, social & governance (or 'ESG'), are areas that need to be taken seriously - both nationally and internationally - as part of a company's business and communication strategies.

There are different ways of approaching this:

  • As an extension of competition between companies. Although this approach will consume time and money, the first to adopt it and perform well will be the winners.
  • As a new segmentation of markets, by country and by customer groups (public authorities, large corporations, committed consumers, etc.), whose purchasing behaviour now depends on their sensitivity to ESG factors.
  • As a corporate project that can mobilise the company's teams, attracting young talent motivated by the prospect of making the sector in which it operates more ESG-compliant.

In this context, it has become essential to not only know and identify the environmental and social risks surrounding the company, but also to be able to build a profitable business trajectory that mitigates these risks. Additionally, it's crucial to share this information with the company's stakeholders, including customers, investors, banks, prescribers, employees, and other relevant parties.

How is ESG measured?

ESG is measured against a set of standards known as 'ESG criteria'. These standards examine a company's extra-financial impact, from its environmental footprint through to factors such as its relationships with relevant stakeholders, including employees, suppliers, customers, partners, and more. The standards also examine a company's management structure, executive compensation, shareholder rights, audits, and internal controls.

ESG Criteria Examples of indicators
Environmental criteria take into account the effectiveness of the actions undertaken by a company to mitigate its impact on the environment. - Footprint: the level of GHG (greenhouse gas) emissions from Scopes 1, 2 and 3 [1], recycling rate, waste management, etc.

- Water management: the volume of water consumed directly or indirectly as a result of the manufacture of the product.

- Biodiversity: the rate at which biodiversity is destroyed or disrupted by the production, storage and distribution of manufactured products.
Social criteria look at how the company manages its relationships with its employees, suppliers, customers, and any stakeholders with whom it does business. - Attracting and retaining employees: voluntary staff turnover rate (%), retention rate, average employee seniority, etc.

- Diversity, equity, and inclusion (DEI): the representation of employees in terms of age or ethnic group, gender pay equality, employment of disabled people, employee training, etc.
Governance deals with the management of the company, executive remuneration, audits, internal controls, and shareholders' rights. - Ethics: the number of confirmed incidents of corruption, monetary losses resulting from corruption and measures taken by the company as a result.

- Governance: the transparency of executive remuneration, the number of women on the Board of Directors, the fight against corruption, etc.

[1] Scope 1 covers direct greenhouse gas emissions, i.e. those directly linked to the manufacture of the product.
Scope 2 refers to indirect greenhouse gas emissions linked to energy consumption.
Scope 3 covers other indirect emissions, which are not directly linked to the manufacture of the product, but to other stages in the product's life cycle (supply, transport, use, end of life, etc.).

How to build an ESG strategy:

Start by considering the following three key questions, each of which will help you understand where your business is on its ESG journey.

1. What negative externalities are involved in the company's activities? How can their direct and indirect environmental impact be measured and managed?

2. What opportunities does this new market expectation offer? Can the company offer solutions as part of the major ESG transformation of businesses (for example, in terms of requalification or the diversification of the offering)? Can this transformation create value through new means?

3. How can the company's activities be reoriented towards a value creation ecosystem that adds environmental sustainability, employee engagement, external partnerships, and broader societal impact to financial imperatives as measures of success?

How to develop a solution:

1. Gather objective data
To act effectively in the long-term, it is in the company's interest to collect and update a range of data from a number of sources, including the following:

a. The company's ESG and carbon footprint reports.
b. Environmental standards in the sector and forthcoming policies yet to be implemented, both in the company's own country and in the international markets in which it operates.
c. Carbon prices and carbon offset schemes in the countries where it operates.
d. Recognised certification bodies in the target markets, existing environmental labels, etc.
e. Market studies that take into account the segmentation of customers according to their sensitivity/requirements with regard to ESG standards.

2. Define an ESG strategy
Create an action plan that gradually integrates key ESG themes into all of the company's operations, from sales to investment, innovation, and beyond. ESG transformation can be costly and time-consuming to undertake but will be rewarding in the future for those who implement it.

3. Share this strategy
ESG disclosure requirements are becoming increasingly standardised and regulated. As a result, more companies are collecting, monitoring and communicating the ESG information they have at their disposal to access new forms of financing and new markets, particularly public markets. It is therefore essential to inform stakeholders (employees, banks, customers, agents, distributors, etc.) of the roadmap underway.

4. Regularly measure the company's environmental impact
Adopt the 'life cycle analysis' methodology to measure the full impact of your activity. Set targets, carry out a gap analysis, gather information from stakeholders, record key performance indicators on a roadmap, and report on your progress.

5. Learn from ESG best practice
Benchmark yourself against companies that have achieved the highest ESG scores in your industry while delivering strong returns. Conduct materiality assessments to determine ESG objectives and follow industry standards.

If a company can establish a profitable strategy that takes into account the improvement of its ESG criteria, it will send a positive message to the wider ecosystem, in particular to the markets in which it operates and the financial bodies with which it works. In addition to demonstrating the commitment of the company and its governance, this strategy will be beneficial in terms of penetrating new markets and obtaining new financing.

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