From boardroom table to pub garden bench, the term ESG is getting more and more talked about. But what’s caused the increase in attention and why is there such debate about the topic? In this blog we cover the basics of ESG and then dig into why there’s such a stir around the term. 

(Bear with us, it’s a long one, but it’s an important one. In case you’ve only got time to scan, we added ‘the short version’ to each paragraph.)

So first up, what is ESG and what’s it used for?

ESG is a set of standards that measures a business’s Environmental, Social and Governance impact - and how transparent and accountable it is. The measurement tool is used by people across the business and considered by analysts when evaluating prospective investments.

Environmental
Referring to the company’s environmental footprint and actions (this includes action against climate change, harmful emissions and greenhouse gases, use of clean water).

‍Social 

Referring to how the company manages its relationships with employees, suppliers, customers, communities, which includes labour standards, health and safety, relationships and more.

Governance 

Referring to the quality of company management, the remuneration of the managers, audits and internal control, transparency of the management, etc. 

What’s the history of ESG?

The ESG acronym first came into use in 2004 when Kofi Annan, the then UN Secretary, asked the world's financial institutions to incorporate environmental, social, and governance concerns into capital markets. 

Before this the key term was SRI (Socially Responsible Investing), which focused more on ‘negative screening’ to exclude problem industries such as tobacco, firearms or gambling from investment portfolios. 

The newer ESG analysis was said to be broader reaching. That is, rather than just eradicating ‘sin stocks’ from a portfolio, it would look deeper at the remaining universe, evaluating factors like health and safety policies, water management, supply chains, and corporate culture.

What’s the difference between CSR and ESG? 

Short version: CSR is an internal ‘do good' framework for a business and ESG is an external measure.

Corporate Social Responsibility or CSR is the business terminology used to frame how a business will be socially responsible. This typically covers all the ESG elements. ESG is or should be the measurable outcomes that manifest from a CSR programme.  

The ESG investing boom

In recent years, markets have seen a large increase in demand for ESG investments as both individuals and organisations are increasingly realising the impact their investments have beyond economics. 

Beyond just feeling good about yourself, it’s widely accepted that taking ESG metrics into an investment strategy is critical to cover longer term risk. Market disruption and uncertainty caused by the pandemic in 2020 led many investors to turn to ESG funds for increased resiliency. 

What analysis falls into an ESG assessment?

Short version: It’s complex

Unlike financial performance reporting, which is governed by clear expectations on format and content, the world of ESG reporting is still fragmented and confusing.

Currently, each financial institution can use a different set of criteria to analyse ESG risks across their portfolios. So as with many things, it's a case of doing your research to understand how each differs. 

It’s safe to say that there are significant contrasts between measurement systems, as a high performer on one ESG scorecard may not be the same on another. People often talk about how credit rating agencies correlate but scores from external ESG raters don't.

Each framework poses its own set of questions and requirements, some of which cross over, requiring complex checking. Most frameworks need supporting documentation, and many quantitative questions require complex numerical calculations based on multiple data streams. 

A key issue here’s that asset management is a bit of a laggard in data intelligence and science, so there’s often not the data infrastructure (or data quality) to write meaningful reports. (Hello Spherics.)

Examples of ESG reporting frameworks

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How does Spherics play a part in ESG analysis?

Short version: Spherics represent the E in ESG -the environmental component. 

The Spherics footprinting methodology is compliant with the Greenhouse Gas Protocol which is widely recognised and forms the basis, in part, of almost all ESG frameworks. 

We help businesses measure their environmental impact which can then be used to feed into ESG reporting such as SFRD and others listed in the table above.  

Within the table our software covers; environment, carbon, energy, waste and water. We don't currently support businesses with social or governance related measurement. 

Weakness in the ESG reporting framework

Short version: Good things get used for dishonest intentions.

Currently there’s a concern that ESGs are being manipulated. Companies have been able to employ ESG professionals to create a narrative around a niche activity in one area of business, which acts to divert attention from negative impact in another. This is a form of greenwashing and the EU are in the process of bringing in legislation to tighten up on it. Read more here.

This is dangerous because it misleads investors and diverts cash away from businesses who are actually having a positive impact. A fragile reporting system also leads to a lack of accountability of promised improvements.

The call for a change in ESG weighting

Short version: There’s also been a push towards the upweighting Environment or completely scrapping the Social and Governance metrics. That, or at least getting emissions right before moving on to other areas. This is nicely highlighted in a recent article found with the Economist: 

‍ESG is often well-meaning but it is deeply flawed. The industry is a mess and needs to be ruthlessly streamlined. Cut S&G and replace Environment with Emissions. 

The argument here is basically that E, S and G are often conflicting, and trying to perfect them all is impossible - and could lead to a scenario where environmentally disastrous decisions can be covered up by healthy Social and Governmental marks.  

Spherics’ view on ESG weighting

Short version: We’re biassed towards the importance of emissions - ultimately, this is what we do - our product calls for an upweight to the importance of emissions. 

Whilst tackling emissions is urgent, we don’t believe this should be the only measure. Social justice issues, water stress, biodiversity, plastic pollution - everything needs to be taken into consideration during this immense period of change.

About Spherics

Spherics is the award-winning carbon footprinting software that empowers businesses and their supply chains to measure and reduce their emissions in minutes, from as little as £9 per month.

We have two software solutions, one for SMEs and one for larger enterprise businesses that want to understand their supply chain carbon footprint and get more accurate scope 3 data.

‍Find out more on SME carbon accounting software

‍Find out more on our Enterprise solution