ESG standards aim to preserve the planet’s resources, solve social and economic problems and build a global partnership. This article will explain the role of these rules in the board of directors’ functionality.
What are ESG corporate standards?
Environmental protection, social development, intra-corporate relations (ESG) – this kind of “certificate of social and environmental maturity” of companies is becoming increasingly in demand not only in the eyes of environmental organizations but also on the part of investors. It is confirmed by all available data on the outstripping growth of market capitalization of firms that prioritize ESG criteria. The participation of world governments, civil society, and business is necessary to achieve them. It is a set of the company’s environmental, social, and management principles. They determine the degree of its involvement in solving global problems and allow you to assess how the company affects the environment and society and how stable its position in the market is.
Environmental standards set out the rules for a company’s use of natural resources and how environmental risks are managed. Social standards reflect the company’s business relations: the principles of its interaction with employees, contractors and customers. Corporate governance standards show the effectiveness of the company’s internal management processes and the level of legality and transparency of its activities.
ESG standards in a board practice
ESG is the three dimensions by which companies manage sustainability. It is a systematic approach to the management of the company, where corporate governance concerns the management of the company, remuneration of managers, audit, ethics, internal control, and shareholder rights.
To effectively manage the strategy, activities, and processes of sustainable development / ESG in Russian companies, it is necessary to apply a systematic approach to the distribution of functions, powers, and tools used by ESG. At the same time, the most important components of the system and the parties involved in corporate governance are the same, although they are used in different configurations and with varying degrees of involvement. The set of functions in corporate governance must be distributed following the structure of collegiate governance bodies and the approved powers of all parties (participants) of corporate governance.
The global market illustrates the hierarchy of social value and strategic and operational elements of the ESG system in the corporate governance of modern companies. In practical terms, the most important criterion for building an effective ESG system and managing non-financial risks within companies is the rational and administratively fixed distribution of powers and competencies between all parties (participants) of the corporate management: owners (shareholders), boards of directors, boards and management.
The board of directors has the following competencies and performs the relevant functions in ESG and non-financial risk management:
- approves the ESG strategy of the company, including goals, priorities, indicators (sustainable development and/or key performance indicators – KPIs), and major activities in the non-financial area – CSR;
- approves the budget;
- controls management activities in this area, and also approves the procedures and the sustainability reporting standard used.
So, implementing ESG principles is a time requirement, meeting the expectations of investors, customers, employees, and consumers. The ESG index clearly shows how an enterprise takes care of the environment, what working conditions it creates for employees, and what strategy it follows. It is worth paying attention to these principles for all enterprises relying on international cooperation and attracting investors. According to market participants, the demand for ESG financing instruments worldwide is already relatively high.