The Purpose Dictionary Part 3 - Demystifying the "E" in ESG
Sustainability or the E in ESG is arguable the most jargon-riddled concept. With the list of terms and processes, it often feels like a whole new language. Terms like TCFD, GRI, and Scope 3 emissions can feel overwhelming, creating a barrier to understanding a crucial concept: sustainability.
This edition of The Purpose Dictionary cuts through the confusion, unpacking the key environmental factors in ESG.
The Framework:
ESG 101: ESG stands for Environmental, Social, and Governance. The "E" focuses on a company's impact on the environment and its commitment to sustainability.
Understanding Environmental Impact:
TCFD, GRI, CDP: These acronyms represent leading frameworks for environmental disclosure. The Task Force on Climate-related Financial Disclosures (TCFD) sets best practices for companies to report climate risks and opportunities. The Global Reporting Initiative (GRI) provides a comprehensive framework for environmental, social, and governance reporting. Finally, CDP (formerly Carbon Disclosure Project) is a global disclosure system for managing environmental impacts.
Scope 1, 2, and 3 Emissions: Understanding a company's greenhouse gas footprint is crucial. Scope 1 emissions come directly from owned or controlled sources (e.g., factory emissions). Scope 2 emissions are indirect, stemming from purchased energy. Scope 3 encompasses all other indirect emissions across a company's value chain.
SASB: The Sustainability Accounting Standards Board (SASB) provides industry-specific standards for disclosing financially material sustainability information to investors. This ensures companies are transparent about environmental risks and opportunities relevant to their sector.
Beyond Carbon: A Holistic View
Integrated Reporting: This approach merges financial and sustainability reporting, offering a complete picture of a company's performance and long-term value creation strategy. It considers environmental factors alongside financial ones.
Natural Capital: This term recognizes the essential role that natural resources like forests, water, and clean air play in our economy and society. Responsible companies are mindful of their impact on natural capital.
Biodiversity: Environmental sustainability goes beyond emissions. Biodiversity, the variety of life on Earth, is crucial. Companies need to consider their impact on biodiversity and dependencies on natural ecosystems.
Responsible Transitions and Positive Impact
Just Transition: Shifting towards a sustainable economy should be fair and inclusive. The concept of a Just Transition acknowledges the potential impact on workers and communities and aims to minimize disruption.
SDG Alignment: The UN Sustainable Development Goals (SDGs) address global challenges like poverty and climate change. Companies that align their strategies with the SDGs demonstrate a commitment to broader societal well-being.
Double Materiality: This concept recognizes the impact of external factors on a company (financial materiality) and the impact the company has on the environment and society (impact materiality). It encourages companies to consider both sides of the equation.
Metrics that Matter:
Circularity Metrics: The circular economy aims to minimize waste and maximize resource efficiency. Circularity metrics assess how well a company or product adheres to these principles, focusing on resource use and lifecycle impacts.
Misleading Strategies:
Greenwashing refers to misleading claims about environmental practices or benefits. Understanding this term empowers you to critically evaluate a company's environmental commitments.
Investing for a Sustainable Future:
SRI & Impact Investing: Socially Responsible Investing (SRI) involves aligning your investments with your values, seeking companies with strong environmental practices. Impact investing goes a step further, actively investing in solutions to social and environmental challenges while expecting a financial return.