1. Summary

ESG, which stands for Environmental, Social, and Governance, is essentially a framework for evaluating a company's sustainability and ethical impact, beyond just financial performance. Think of it as a way to assess how well a company is looking after the planet, its people, and how it's run, according to business guidance resources.

2. What does each component mean:

Environmental (E): This refers to a company's impact on the natural environment. Are they polluting? Are they trying to reduce their carbon footprint? Think of it as their "green-ness" score.

Environmental factors include but are not limited to:

• Energy consumption and renewable energy use;
• Water usage and conservation;
• Climate change and carbon emissions;
• Waste management and pollution;
• Biodiversity and de-forestation;
• Green Supply chain.

Social (S): This focuses on a company's relationships with its stakeholders, including employees, customers, and the communities they operate in. Are they treating their workers well? Are they diverse and inclusive? Are they giving back to society?

Key social factors include but are not limited to:

• Labour practices and working conditions (e.g., fair wages, health and safety);
• Diversity, equity, and inclusion;
• Customer data privacy and product safety (GDPR);
• Community relations and charity efforts.

Governance (G): This is all about how a company is run – its leadership, transparency, IT, controls, practices and accountability. Are they honest and fair in their dealings? Do they have ethical business practices?

Governance factors include but are not limited to:

• CyberSecurity Risk;
• Data Driven Decision Making;
• Transparent and accurate reporting;
• Anti-bribery and anti-corruption policies;
• Ethical business conduct;
• Board diversity and independence;
• Executive compensation;
• Shareholder rights.

Why is ESG important?

ESG has become increasingly important for several reasons including:

• Environmentally it focuses on how the business minimises its impact on the environment. It covers the business's products/services, the supply chain and operations. ESG allows the business to target different areas of its organisation and implement more sustainable, ethical practices.
• Regulatory Scrutiny: Governments and regulatory bodies are increasingly implementing regulations and reporting requirements related to ESG, making it crucial for companies to track and disclose their performance in these areas.
• Competitive Advantage: Companies that prioritize ESG can differentiate themselves in the market, appeal to a broader customer base, and even drive innovation in developing more sustainable products and services.
• Risk Management: Addressing ESG factors can help companies identify and mitigate potential risks, such as regulatory fines, supply chain disruptions, or damage to their reputation.
• Reputation and Brand: Strong ESG performance can enhance a company's reputation, build trust with customers and employees, and attract top talent.
• Investor Decisions: A growing number of investors, often called "sustainable" or "responsible" investors, use ESG criteria to screen potential investments. They believe that companies with strong ESG practices are more likely to be sustainable in the long term, perform better financially, and have lower risks.

In essence, ESG provides a comprehensive lens through which to view a company's commitment to sustainability, ethical operations, and responsible leadership.