What is meant by ‘Environmental’ in ESG?

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

Written by: ESG Committee

ESG (Environmental, Social, and Governance) reporting is a framework for measuring the sustainability component, namely it provides insight into how a company manages environmental, social, and governance activities.

This new and advanced concept, in addition to the progressiveness it provides in corporate management, also represents a considerable challenge that imposes the necessity for anticipation of all aspects during its implementation. Hence, the approach to presenting the ESG concept must be meticulous and comprehensive.

In that direction, it is essential primarily to expound on the meaning and purpose of each of the three fundamentals ESG is based on, beginning with the first letter of the acronym, which refers to Environmental.

The Environmental aspect of ESG represents a company’s strategic commitment to preserving the environment, particularly protecting nature, reducing the negative impacts of climate change, and sustainable use of natural resources. However, it is crucial to emphasize that although activities related to the environment have the broadest practical application, social and governance issues are equally important. On top of everything, the ESG concept is an excellent example that sustainability encompasses much more than just environmental issues.

Why are environmental issues part of ESG?

Factors related to climate change and the management of natural resources strongly influence the modeling of the society in which we live today because sustainable development and future prosperity are ensured through them. The state of the environment is also closely related to human health and well-being because heat waves, floods, degradation of fertile land, and loss of biodiversity are threats that already call into question the provision of basic needs such as clean air, water, and food. In addition, climate risks threaten to deepen the inequality between social classes, thereby decreasing global economic growth.

With emerging challenges related to the environment, the need to undertake activities in this regard by all social stakeholders is becoming more relevant. Therefore, if factors associated with climate change and natural resource management were once considered trivial aspects of corporate governance, today, these factors play a crucial role in the decision-making processes of companies.

Environmental safeguarding creates value for companies

As a result of the actualization of environmental issues, companies face the challenge of having to adapt to the new requirements imposed by the markets to redesign business models. Indeed, building a corporate brand image based on the establishment of practices that enable care for the environment is valued and recognized by all stakeholders.

Consumers show a strong preference to allocate their purchasing power towards environmentally responsible companies. These companies have better and more affordable access to capital due to greater interest from investors. Given that environmental safeguarding is becoming a top priority in the political agenda, key policymakers are more open to cooperation with companies that share these values. In addition, in experiencing constant and rapid changes in the labor market, these companies have the status of “preferred employer” because they have developed a corporate culture that overlaps with the values ​​of the employees.

How and which activities related to the environment are measured?

The process for measuring the impact of corporate activities on the environment consists of three stages. It starts with identifying the activities that potentially affect the environment. Then, the key indicators and the reporting period are defined, and, as a third, final stage, there is a precise delegation of responsibilities to all competent organizational units.

Indicators related to the environment, although they largely depend on the type of industry, may be grouped into several categories:

Electricity consumptionGreenhouse gas emissions
Water consumptionWaste management
Paper consumptionUse of natural resources
Air pollutionNoise emissions

Some of the indicators that are measured within these categories are the amount of electricity consumed, the amount of electricity used/produced from renewable sources, the amount of water consumed, the paper used and recycled, the emission of particles into the air, the emission of greenhouse gases during business trips, the amount of generated waste, the rate of recycled waste, the total area of land used, etc.

These indicators depict the effects and impact of the activities of a company on the environment, both in terms of its direct operations and throughout the supply chain.

Challenges in implementing ESG

Like any other process of monitoring data and preparing a report, this one is complex and requires the allocation of resources. Lack of knowledge of the subject, including low awareness of the importance and benefits of this concept, is another challenge that deserves particular attention in order to create conditions for its implementation. Companies still do not recognize that if they do not integrate ESG practices into their operations, they will not be able to cooperate with other companies and corporations, they will face regulatory restrictions and sanctions, and they will face significant challenges to protect their corporate image. The process of implementing the ESG concept is further complicated by the fact that there are still not any commonly accepted and unified rules for ESG reporting worldwide. In other words, a comprehensive and functional framework has not yet been defined.

These challenges can be overcome through a constructive partnership between key policymakers and stakeholders. It is the most appropriate way to ensure the right strategic directions and incentives and to transform the needs into effective and practical solutions.

Best corporate practices to improve the results of activities related to the environment

Digitization of processes and use of digital services, installation of solar collectors, and reconstruction of buildings to ensure high energy efficiency are some of the practical examples implemented by companies in reducing electricity consumption. In order to reduce greenhouse gas emissions, more and more companies have opted to purchase electric vehicles or to organize actions for afforestation. In the efforts to achieve the goals for responsible use of water, companies are establishing systems for automatic control of consumption. Furthermore, initiatives are being implemented to reduce electronic waste and reuse old electronic devices. Activities are also being undertaken to support business ideas and concepts for dealing with climate change through the organization of workshops, mentoring, and financial resources for their completion.

These are just a few of the positive examples implemented by the companies that are part of the ESG Committee established by the American Chamber of Commerce in North Macedonia.

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