e-in-esg
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Understanding the E in ESG

January 17, 2023

ESG refers to the environmental, social, and governance aspects of businesses. In this article, we explore the 'E' in ESG and why it's an important consideration for businesses and investors. 

What is the 'E' in ESG? 

The 'E' in ESG is one of three criteria concerning more transparent communication between businesses and their Stakeholders. Specifically, it stands for 'environment', which is dealing with environmental risks and natural resource management. Under this sphere, companies measure and report their environmental impact and performance against pre-determined criteria.

What are environmental criteria?

Environmental criteria vary from industry to industry depending on the unique operational settings and production processes of a company as well as the regulatory climate in which it operates. Today, they determine how well a company performs.

Here is a non-exhaustive overview of environmental criteria common across industries.

Pollution and Waste Management
Description Economic activities that produce toxic byproducts which pollute our air, land, and waterways must be monitored and managed according to local laws and industry best practices. Chemical-intensive industries such as agriculture, manufacturing, and construction are major environmental polluters. The overuse of fossil fuels like oil and gas, the introduction of pollutants in the form of chemicals, or even noise and light into the environment can have uncontrolled and unpredictable consequences for ecosystems and local communities. Pollution is closely related to waste management.
Indicators Investors and regulators want to see that there are waste management systems in place and compliance with existing regulations. Companies should focus on a preventative approach to reduce the risk of pollution while being ready with a remediation plan. Some indicators used include wastewater discharge limits, pollutant concentrations, emission limits, ambient air quality, handling of hazardous and non-hazardous waste, etc.
Risks Failure to control pollution could result in significant fines and penalties, reputational damage and suspension of license to operate, and remediation measures that may cost even more than pollution prevention measures.
Opportunities In the long run, pollution control measures could result in cost savings due to better efficiency. Turning waste into energy or other forms of revenue generation represent another financial opportunity.

Emissions and Climate Change
Description Greenhouse gas emissions are a company's direct contribution to climate change. These days public pressure is holding companies accountable for their emissions. Overemphasis on emission reductions skews the focus heavily on risk, but other climate-related threats should be a part of a company's climate adaptation plan.
Indicators A company's contribution to climate change is measured by its sustainability. This includes its energy consumption, energy efficiency, and emissions levels as well as reduction targets. Increasingly, sustainable investing has become more relevant. investors want to see a transition plan that signals a company's adaptability to a future low carbon footprint. Part of this transition plan should include a risk assessment and scenario planning analysis as per TCFD recommendations.
Risks Companies may face stranded assets due to the physical and transition risks of climate change. Asset damage and climate-proofing the business may incur additional costs. Production lines can expect more frequent supply disruptions.
Opportunities Businesses that prepare themselves for low carbon emission pathways are better able to overcome the challenges of climate change and differentiate themselves by adapting their business model. Improved energy efficiency and sustainability can result in cost reductions.

Biodiversity
Description Impacts on biodiversity can negatively affect valuable ecosystem services, which are the goods or services derived from nature. Activities that degrade natural habitats, pollute, or overexploit, particularly construction, extractive, and resource-based sectors, are major threats to biodiversity.
Indicators Where biodiversity is identified as under threat, companies should have a biodiversity action plan, relevant certifications or management systems for sustainable use of a resource, procedures to prevent the introduction of alien species, etc.
Risks Biodiversity loss or degradation threatens the availability of natural commodities used to produce goods or services. Companies could face opposition from regulators and communities on activities that affect biodiversity.
Opportunities The active management and conservation of biodiverse areas create potential revenue generation such as carbon credits. Biodiversity conservation ensures long-term resource availability and can improve access to markets.

Resource Efficiency
Description Businesses rely on finite resources such as water, forest-based products, and fisheries, to produce goods and services so there is a vested interest in ensuring the longevity of available resources. Non-linear consumption and production processes that are designed to reuse or recycle materials effectively reduce waste and maximize resource use and hence sustainability.
Indicators Most commonly, investors look at water use, energy use, and raw material use as a measure of resource efficiency. Process design that factors in resource optimization is also considered, as well as the results of lifecycle assessments and compliance with international standards or certifications for resource efficiency.
Risks As demand for resources increases alongside economic growth, companies will have to pay a premium to access resources or experience supply chain interruption.
Opportunities Companies will benefit from getting more output from less input, saving costs, and reducing waste. Circular economy practices can differentiate a company and prepare for supply shortages.

Why is the 'E' important? 

The environmental part of the ESG equation is often given the most emphasis and for good reason. The love for mother earth aside, environmental issues pose the greatest threats to businesses. In the World Economic Forum's Risk Report of the last few years, the top five perceived risks by experts are all environmental risks, with climate-related risks topping the list in 2022. These risks have a direct impact on the everyday operations of a business. From supply shortages to asset damage to public retaliation, businesses have a very real incentive to manage their environmental footprint and prepare for a future with more volatile environmental events. And it's not just risky business. The opportunities to cater to changing regulations, demographics, and investment priorities are enough to drive the most forward-looking companies to embark on sustainability transformations that reinvent their business models and place them ahead of the curve. 

ESG and Daato

The Daato software is a powerful ESG data management system that enables mid- to enterprise-level companies to collect, organize, and understand their environmental data. Our customers use Daato to exchange data with stakeholders, keep track of changes to their data repository, and even auto-generate framework-compliant reports. The key to taking charge of your environmental performance is data, and Daato was created for that purpose. The software tells you what environmental indicators you need to measure and report depending on the legislation in effect or your chosen reporting framework, and it generates analytical reports that can help you identify gaps in performance. Getting the 'E' in ESG right is critical to navigate your business through the risks and opportunities associated with environmental factors

How we help you

  • We provide a centralised platform to manage all your data, pulling data from enterprise software such as ERP,HRM, EMS, etc.
  • We guide you on the environmental indicators to focus on and the metrics to collect.
  • We offer insights powered by data analytics, enhancing your understanding of the strength of governance.
  • We help you complete the requests from investors on corporate governance matters and guarantee the protection of business-critical information, for example about sensitive business strategies.

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