ESG Framework

ESG stands for Environmental, Social and Governance. It is a framework used to assess how an organization manages its environmental impacts, relationships with people and stakeholders, and systems of governance. ESG has become an important part of modern corporate strategy because financial performance alone does not fully explain an organization's long-term sustainability and risk exposure.

The three dimensions of ESG are:

• Environmental (E): Examines the organization's impact on climate, natural resources and ecosystems.
• Social (S): Examines how the organization treats employees, customers, suppliers, communities and other stakeholders.
• Governance (G): Examines how the organization is directed, controlled and held accountable.

1. Environmental Dimension

The Environmental dimension focuses on the relationship between business activities and the natural environment. Organizations use energy, water and natural resources and may generate emissions, waste and pollution.

Major environmental ESG issues include:

• Climate change and greenhouse-gas emissions.
• Energy consumption and renewable energy.
• Water consumption and conservation.
• Waste generation and recycling.
• Air and water pollution.
• Biodiversity protection.
• Sustainable use of natural resources.
• Circular economy practices.

For example, a manufacturing company may measure its carbon emissions, energy consumption, water usage and waste generated. These indicators help management identify environmental risks and opportunities for improving operational efficiency.

Greenhouse-gas emissions are commonly classified into Scope 1, Scope 2 and Scope 3. Scope 1 covers direct emissions, Scope 2 primarily covers emissions associated with purchased energy, and Scope 3 covers other indirect emissions across the value chain.

2. Social Dimension

The Social dimension examines how an organization affects people and manages its relationships with different stakeholders.

Important social ESG areas include:

• Employee health, safety and welfare.
• Human rights.
• Fair wages and labour practices.
• Diversity and inclusion.
• Employee training and development.
• Customer health and safety.
• Data privacy.
• Responsible supply chains.
• Community development.
• Indigenous and local community rights.

Social ESG also extends beyond direct employees. Companies increasingly examine labour practices and human-rights risks within their supply chains, particularly where suppliers operate in high-risk industries or locations.

3. Governance Dimension

Governance refers to the systems through which an organization is directed, controlled and held accountable. Effective governance provides the foundation for managing environmental and social responsibilities.

Major governance issues include:

• Board composition and independence.
• Business ethics.
• Anti-corruption and anti-bribery.
• Risk management.
• Internal controls.
• Transparency and disclosure.
• Executive remuneration.
• Shareholder rights.
• Regulatory compliance.

Good governance ensures that ESG commitments are supported by clear responsibilities, policies, controls, monitoring and accountability.

ESG and Materiality

Materiality in ESG means identifying the environmental, social and governance issues that are most important to a company and its stakeholders. Not every ESG issue has the same importance for every business. Once material issues are identified, the company focuses its resources, targets, measurements and reporting on those issues.

The material ESG issues differ across industries.

• Mining companies may consider water, biodiversity, land use and community relations highly material.
• Banks may focus on responsible lending, data security and financial inclusion.
• Airlines may focus strongly on carbon emissions and fuel efficiency.
• Technology companies may consider data privacy, cybersecurity and employee skills highly material.

Therefore, ESG reporting should focus on the issues that are most significant to the organization and its stakeholders.

ESG Reporting and Frameworks

ESG performance is increasingly communicated through standardized sustainability and corporate reporting frameworks.

The Global Reporting Initiative (GRI) enables organizations to report their impacts on the economy, environment and people. Its current system consists of Universal Standards, Sector Standards and Topic Standards. The revised Universal Standards became effective for reporting from January 2023.

The International Sustainability Standards Board (ISSB) issued IFRS S1 and IFRS S2 in June 2023. IFRS S1 addresses sustainability-related financial risks and opportunities, while IFRS S2 focuses specifically on climate-related disclosures.