(Originally published on LinkedIn April 4, 2019)
For those of you interested in socially responsible investing, employers, or entrepreneurial pursuits, many terms get thrown around like “triple bottom line,” “circular economy,” “P3” (people, planet, profit), “impact investing,” etc. that can be difficult to parse through. But the concept and term that seems to be gaining use by companies and investment professionals now that is an actually somewhat quantifiable standard is “Environmental, Social, and Governance (ESG)” criteria. I was not very familiar with this term or how it was defined or practiced, so I went and did some digging that I thought I’d share.
ESG criteria are a set of standards for a company’s operations that socially conscious or sustainability-minded investors can use to screen potential investments. It can also be a guidepost for choosing an employer, or for starting a company, since as Jigar Shah says in his book Creating Climate Wealth, an entrepreneur should never start a venture as a way to make money, but instead focus on solving real problems. In broad strokes, ESG criteria are broken down into the three interrelated areas indicated in the title. Environmental criteria consider how a company performs as a steward of nature. Social criteria rate how a company manages relationships with its employees, suppliers, customers, and the communities in which it operates. Governance involves a company’s leadership, executive pay, accounting practices, and shareholder rights. Examples of ESG criteria used by investors include the company’s impact on climate change or carbon emissions, water use or conservation efforts, anti-corruption policies, board member diversity, human rights efforts, and community development.
Environmental criteria take into consideration a company’s energy use, waste, pollution, carbon emissions, natural resource conservation, and animal treatment. Particular emphasis is placed on how a company manages environmental risk and which of those risks might affect the company’s income.
Social criteria evaluate the company’s business relationships. Whether suppliers reflect the company’s values, whether profits are donated to community causes, how the company values its employees’ health and safety, and fiduciary responsibility on behalf of shareholders are all considered.
Governance gets into whether a company uses accurate and transparent accounting methods, represents common and minority shareholders fairly e.g. allowing them to vote on important issues, whether the company avoids conflicts of interest among its board members, whether there is diversity among the leadership and board, and whether the company engages in illegal behavior or uses political contributions to obtain favorable treatment.
All of the ventures I’ve been involved in founding have tried, not always successfully, to apply these criteria in one form or another. We have tried to 1) reduce greenhouse gas emissions (environmental), 2) create jobs (social), and 3) increase domestic energy security while operating with efficiency and transparency to government, shareholders, and employees (governance). We have tried to create economic impact and community development via use of drought-resistant crops and reuse of waste materials to make biofuels and co-products in efficient capital facilities that displace fossil fuels and improve human and environmental health. In more recent ventures my goal was to recover industrial wastes in an “industrial symbiosis” approach to create cradle-to-cradle use of resources so that waste could be converted to energy, wastewater recycled, etc. in order to achieve similar goals, with water conservation emphasized.
ESG is a paradigm, a target to aspire to, rather than a completely achievable end goal, difficult to endeavor and creating all sorts of internal and external conflicts. But, with all of the issues of environmental sustainability and social and economic equity that we face today, it is a target worthy of study and consideration.