Could you briefly explain what ESG is?
ESG stands for Environmental, Social, and Governance and means that companies are assessed based on factors related to these general themes. Different types of sectors and businesses face different kinds of ESG risks and opportunities.
For E (environmental), I look at how a company’s business affects the environment it is surrounded by or depending upon. Climate risk is often included in ‘Environment’.
For example, how a building such as an office or a production facility affects its surrounding environment, during its construction as well as once in use, is considered in the analysis. We are also interested in the opposite, i.e. how resilient the building and the business are to climate change. Hotter summers, more frequent storms, rising sea levels can pose risks, as well as sharpened environmental requirements.
For S (social), we want to understand how a project or company affects surrounding community as well as its employees. Areas of focus are workplace safety, labor rights, diversity and inclusion, as well as human rights due diligence for projects. Staff and workers are important for any type of business and proper investment in human capital is important for future profitability, as is the community’s approval of the business operations in the area.
For G (governance), an ESG analyst investigates how the company or project is managed in terms of management systems, transparency and stakeholder communication. Governance can mean many things and is of course relevant for a so called traditional analysis as well as financial crime analysis. A way of confirming that the ESG management systems are working is to investigate if companies are involved in controversies which relate to ESG areas. This is not only important from an ESG risk profile, but also from a reputational risk standpoint.