ESG – The New Heir to the Throne in the Corporate Governance

*The article in Macedonian language, published by Kapital can be found at the bottom of this page.

Written by: AmCham ESG Committee

The Corporate Social Responsibility Concept has played its role perfectly in setting new, upgraded standards in corporate governance. Many societies around the globe have benefited from its ideas, principles, and values. However, even this concept has not remained immune to the demands of this new era for continuous improvement and mastering, which has resulted in the creation of a new and advanced concept in corporate governance, namely, the ESG Concept. The evolution of this concept largely results from the increasing challenges related to climate change, the need to strengthen the resilience capacities of societies through investments in human capital, and the increasingly important role of corporate culture in the development of communities.

ESG is an acronym for Environmental, Social, and Governance. It refers to the activities of the companies related to addressing environmental, social, and governance issues. Indeed, ESG is a response to the rising requirements for the companies to consider the environmental and social factors in corporate decision-making, as well as to the public pressure for increased transparency in reporting regarding these activities.

Distinction between ESG and Corporate Social Responsibility Concepts

Although it is a great challenge to make a clear distinction between the ESG Concept and the Corporate Social Responsibility Concept, drawing a parallel between these two concepts is the best approach for introducing the ESG Concept before diving into details of the meaning and importance of the fundamentals on which this concept is based.

Establishing practices and policies by the corporate sector that aim to positively influence society is at the core of both concepts. But, although the core of both concepts is identical, they are very different in approach.

The purpose of the Corporate Social Responsibility Concept is to ensure that the activities of the companies have a positive impact on societies, i.e., companies have increased understanding and responsibility for the impact of their decisions. The ESG Concept undertakes that purpose and builds on it in a way that defines criteria and indicators for measuring the effects of these companies’ activities. Both concepts are focused on completing social responsibility activities, but if the ultimate goal of the Corporate Social Responsibility Concept is the implementation of these activities, the ultimate goal of the ESG Concept is continuous improvement of the results of those activities. Moreover, if the Corporate Social Responsibility Concept provides space for every company to self-declare as socially responsible, regardless of the activities undertaken or the degree of their impact, the ESG Concept provides quantitative data based on unified indicators. These indicators allow not only measuring the impact of the activities and monitoring the progress but also opportunities for comparative insight between companies from various industries.

Based on the parallel drawn between these two concepts, the conclusion is that the ESG Concept implies the establishment of a performance measurement system for the companies’ activities related to the environment, social, and governance issues as fundamentals that define the agenda of a company for sustainable development and social responsibility.

Creating new business opportunities for companies

For each of these three fundamentals, goals, criteria, and indicators are defined that should be measured, monitored, and analyzed in order to achieve the desired result of a positive impact on societies.

Criteria related to the Environmental aspect refer, but are not limited, to combating climate change and environmental and natural resources protection. Indicators for measuring the impact of a company’s activities include, for example, the measurement of greenhouse gas emissions, consumption of electricity and water, etc. The Social aspect, in essence, refers to the social relations, that is, how a company influences and manages its relationship with the employees, customers, suppliers, as well as the community in general. Measured indicators in this segment include, for example, employee turnover rate, number of training hours for employees, etc. Criteria related to Governance refer to the manner in which the company is managed, including data for management structure, financial transparency, etc.

Considering the broad spectrum of company performance measurements, the first impression is likely to be that investing in ESG implies a high cost to companies in the short term. This is an accurate assessment but having and implementing a long-term ESG strategy positively correlates with financial profitability. There are several factors that contribute to long-term financial gains. One such factor is the creation of new business opportunities for companies, primarily a result of the recent generations becoming an increasingly significant part of the consumer and investor base. These recent generations tend to support the companies that share their values, and they are willing to pay more for sustainable products. Another factor is that the ESG Strategy will contribute to the advancement of a company’s business operations by increasing employee productivity and reducing production costs through improved efficiency.

Individual approach for each company

However, it is important to note that developing an ESG strategy requires an individual approach for each company, making the process itself a challenge. Indeed, developing and implementing an ESG strategy is a long-term and continuous process. The process must take into consideration the external factors which influence the business, such as the social, economic, and political context, the industry, and the design and structure of the entire supply/value chain. But, at the same time, developing an ESG strategy is an introspective process. It helps companies to improve their activities and find and foster the organization’s true values.

Therefore, the ESG concept is becoming increasingly popular, and many companies, often voluntarily, integrate ESG into their annual reports to demonstrate how the sustainability aspect is embedded in their business model. Also, in recent years, regulatory requirements have been introduced in relation to corporate ESG data reporting, which is another indicator of the future role and importance of the ESG Concept.

How influential the corporate culture focused on continuous improvement is, both from an internal perspective as well as from the perspective of the communities around it, shows the vulnerability of the systems and societies to the challenges we face. Therefore, the premise “The best time to act is today” becomes true, and implementation of the ESG Concept in corporate governance is the right step in that direction.

Acknowledging the importance of the ESG concept, the American Chamber of Commerce in North Macedonia has established the ESG Committee. The goal of the Committee is to increase awareness of the ESG concept by sharing best practices and educating companies on the development and implementation of ESG strategies and reports. In addition, this Committee also serves as a proactive platform to alert companies of all regulatory requirements related to activities that are under the scope of the ESG concept, including European Union Acquis.

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