Blog Archives

What does the acronym ESG mean about a company?

An acronym is used to refer to a business's best environmental, social and governance practices -- but it can also be a criterion for investments. Understand.

Anyone who thinks that it is mandatory to choose between building a more sustainable world or having good financial results in a company is wrong. On the contrary: caring for the environment, being socially responsible and adopting better governance practices are, in fact, factors that help companies' balance sheets – and this is one of the reasons why terms like ESG have become more popular.

A study carried out by the consultancy BCG, for example, showed that companies that adopt better environmental, social and governance practices see several positive impacts, such as greater profitability and even an improvement in their market value over time.

In other words, businesses that are committed to the best management practices end up having a more sustainable operation in several aspects, including economics and risk management -- and, as a consequence, generate better results over time

. is ESG?

ESG is the acronym for "environmental, social and governance", generally used to measure a company's environmental, social and governance practices.

ESG can be used to say how much a business looks for ways to minimize its impacts on the environment, build a fairer and more responsible world for the people around it and maintain the best management processes.

In addition, ESG can also be used for investments with sustainability criteria. Instead of analyzing just financial ratios, for example, investors also look at environmental, social and governance factors in a company.

What is the origin of the acronym ESG?

The acronym ESG first appeared in a 2005 report entitled "Who Cares Wins", the result of an initiative led by the United Nations.

At the time, 20 financial institutions from 9 different countries – including Brazil – met to develop guidelines and recommendations on how to include environmental, social and governance issues in asset management, securities brokerage services and related research.

The report's conclusion was that the incorporation of these factors into the financial market generated more sustainable markets and better results for society.

And what does each letter of this acronym mean?

The acronym ESG unites three factors that show how much a company is committed to having a more sustainable operation in environmental, social and governance terms.

Each letter has a meaning:

E ​​(environmental, in English, or environmental, in Portuguese)

The letter E of the acronym refers to the practices of a company in relation to the conservation of the environment and its performance on topics such as:

Global warming and carbon emissions;
Air and water pollution;
Biodiversity;
Logging;
Energy efficiency;
Waste Management;
Water shortage.

S (social, in English and Portuguese)

The letter S refers to a company's relationship with the people who are part of its universe. For example:

Customer satisfaction;
Data protection and privacy;
Team diversity;
Employee engagement;
Relationship with the community;
Respect for human rights and labor laws.

G (governance, in English, or governance, in Portuguese)

Finally, the letter G refers to the administration of a company. For example:

Composition of the Board;
Audit committee structure;
Corporate conduct;
Executive compensation;
Relationship with government entities and politicians;
Existence of a whistleblowing channel.

ESG Funds

It is not new that large investors have been carefully looking at the social, environmental and governance practices of companies before placing two very important points in them: trust and capital.

For investors, ESG practices have become even more relevant with the COVID-19 pandemic: 77% of investors surveyed have significantly increased their ESG investments, according to a global survey of institutional investors conducted by MSCI.

In the market today, it is possible to identify different ways of investing in ESG: either through Funds of Funds (FoF) -- which direct part of their capital to sustainable actions, or through investments in fixed income. According to B3, at the end of 2020 there were 14 debentures and six Real Estate Receivables Certificates (CRAs) -- reaching a figure of BRL 6 billion in ESG investments.

As in other investment categories, in the ESG world there is also the possibility of issuing debt securities, the so-called ESG Thematic Securities, whose objective is to attract capital for projects that have a real and positive socio-environmental impact. These bonds are divided according to their purposes:

Green Bonds: investments related to renewable energy; pollution prevention and control; conservation of biodiversity etc.;
Social Bonds: aimed at projects to create jobs, food security, basic infrastructure, etc.;
Sustainability Bonds: investment in projects that combine "green" and "social" -- socio-environmental actions.

In addition, companies that aim to achieve ESG goals can issue Sustainability-Linked-Bonds, as long as these success metrics (KPIs) are well defined. Example:

Achieve 100% renewable electricity by 2025;
Reduce greenhouse gas (GHG) emissions by 30% by 2040.

What is Greenwashing?

"The company that pollutes the least in its sector", "the company that emits the least carbon in the world"... these are examples of phrases that we should be aware of: exaggerating when disclosing results and practices linked to ESG can configure greenwashing ( washing green, in free translation).

In other words, greenwashing is the practice of companies that disclose false or suspicious data and information about their sustainable actions - mostly with the intention of attracting the eyes of investors, as this is a major concern of those who invest..

Given this lack of transparency that has been happening, in May this year the SFDR (Sustainable Finance Disclosure Regulation) was created in Europe.

Basically, the SFDR regulates transparency in the disclosure of data on ESG practices within companies and on their investments. The objective is to prevent false or exaggerated news from being disseminated to the market through its websites, printed material or even in its periodic reports. In addition, the managers of these funds must detail which metrics are used to measure how sustainable such practices are.

Green seals

Consumer or manufacturer: Green seals were created to make both aware of the environmental impact that a product or service can have. According to the Brazilian Institute for Consumer Protection (Idec), today there are approximately 400 stamps with sustainable appeal in the world.

However, it is necessary to pay attention to the veracity of these certifications, as the practice of greenwashing can also be observed in the creation of seals that tell a story that is not true. See the top 10 official seals, according to Idec:

100% seal (FSC): 100% of the raw material comes from well-managed forests;

Recycled Seal (FSC): recycled raw material with guaranteed certified forest;

Mixed Seal (FSC): At least 70% of the raw material comes from certified forests and 30% from wood of controlled origin;

Product Seal (FSC): wood coming from certified forests;

100% Community (FSC): Social seal -- raw material comes from small products and communities;

Procel Energy Saving Seal: Created by the Ministry of Mines and Energy in 1993, it aims to encourage the manufacture of electronics that are more efficient, and therefore save more energy;

IBD Organic Seal: meets the norms of the European Common Market, the North American Market, and the sectors of agriculture, livestock, fibers, aquaculture, processing, inputs, extractivism, cosmetics, wines and cleaning products;

Ecological Label (ABNT): attests that the products had a low environmental impact on air, water, soil and health throughout their life cycle;

CCF Rabbit (Choose Cruelty-Free): attests to companies that do not test their products and services on animals. The NGO responsible for the certification is Australian;

Rainforest Alliance Certified (Imaflora): indicates that a farm, forest or tourism business meets established environmental, social and economic sustainability standards.