What Is ESG?
ESG is an acronym that defines investments that prioritize sustainability , with values that include an environmental, social and governance approach . In this article we will provide you the definition of ESG.
We cannot say that they are new, as several countries have been using them for more than a decade.
However, their sustainable footprint has given them prominence today, as issues such as the climate crisis and the need for humanization in companies come to the fore.
These and other issues show how urgent it is for organizations to change their posture and start to contribute to healthier and more ecologically correct places and forms of work.
After all, it is useless to obtain high profits at the expense of the deterioration of natural resources and/or the exploitation of workers and the community around the company.
Natural resources are finite , which requires their preservation so as not to compromise the survival of future generations.
People are the most important capital of companies, as the products and services offered by any organization are the result of the knowledge and experience of employees.
Together, these ideals formed the basis for demanding more sustainable practices from companies, resulting in the acronym ESG.
As many corporations seek to attract investments , these practices began to influence the financial market through the creation of funds linked to stock exchanges.
Below, check out details on each of the three pillars that guide ESG business and investments.
Environmental
You know that maxim that, to preserve the environment , everyone needs to do their part?
It is real and includes companies, responsible for much of the carbon emissions that exacerbate the greenhouse effect , contributing to global warming .
The consumption of water, energy and various products is also impacted by the activities of organizations from all sectors, especially large ones.
In this context, companies that are dedicated to reducing carbon emissions and adopting conscious consumption, through dynamics such as the circular economy , gain space .
The circular economy employs reuse, adaptation and recycling to increase the shelf life of products, reducing the amount of waste discarded and the extraction of natural resources to manufacture other items.
Clean energy sources are another positive trend among companies, which reduce the release of CO2 into the atmosphere by replacing fossil fuels with solar, wind, biomass sources, etc.
These actions are part of the E (Environmental, in English, or Environmental, in Portuguese) metric present in the ESG.
Social
The second letter of the acronym indicates attitudes in the field of social responsibility , valuing human capital , customers and society as a whole.
Following the same reasoning as actions in favor of the environment, social practices see the company as part of a great gear, capable of generating positive or negative effects.
By building a harmonious place, balancing different points of view and promoting diversity and respect at work , companies are contributing to the health of employees, who tend to be happier and better serve customers.
This starts with basic measures, such as work safety, workstations and furniture adapted for employee comfort, adequate working hours, periodic breaks, accident and occupational disease prevention programs.
Investing in the organizational climate , in an open policy to give and receive feedback and benefits such as flexibility also help to raise the S (Social) metric of the ESG.
Governance
Completing the acronym, the G (Governance) defines actions in favor of transparency, risk management and company control.
Through good management practices , such as equity and accountability, leaders manage human , material and financial resources aiming at internal and external reliability.
In other words, its employees, shareholders and even society can verify information that confirms the precepts and values adopted by the organization.
Companies that value governance achieve excellence in management , making their processes more efficient and profitable and enabling good environmental and social practices.
It also attracts investors , as the information offered by the company – and its profits – become reliable.
To learn more about ESG, watch the FIA webinar on the topic in this video .
What Is The Origin Of The Acronym ESG?
The use of the acronym ESG is very recent, but to understand how we arrived at it, it is important to go back in time a little.
At least 50 years ago , there was already a concern with investing in sustainable businesses .
The proof of this is that, in the mid-1970s, the acronym SRI appeared , which, translated into Portuguese, means responsible sustainable investment.
From that time on, social factors began to count more and more when choosing which corporation deserved to receive financial support from investors .
Companies that supported the apartheid policy in South Africa or financed the Vietnam War, for example, began to have their investment requests denied due to the causes they defended .
Gradually, these concerns expanded, also focusing on environmental impacts , among other criteria of corporate responsibility of organizations.
The acronym ESG, however, only really appeared in the present century, more precisely in 2005, with the report “ Who cares wins” , written by the United Nations (UN).
The initiative brought together 20 financial institutions from different countries, to define guidelines regarding the inclusion of environmental , social and governance issues in the management of funds and research related to these subjects.
It was then decided that the inclusion of these valuations in the financial market was beneficial not only for companies and investors, but also for society as a whole.
How Important Is ESG?
From the moment that ESG became a criterion for investing in companies, even businesses that did not have this priority began to adopt good practices .
After all, they do not want to be easily discarded when seeking external financial contributions .
It was in this way that a “win-win” relationship began to be created.
Companies started to develop positive socio-environmental and governance actions , thus qualifying themselves to receive capital from investors connected with ESG values.
Investors get a return on their investments, and their images begin to be related to sustainable businesses.
In addition, the population enjoys a more balanced , diverse and transparent scenario.
Especially because everyone benefits from an organization that uses clean and renewable energy, carries out social projects in the community and promotes periodic balance sheets, publishing all relevant public information.
This is just to name a few possible actions.
What Are The Reasons Why ESG Has Gained Prominence Today?
It is no coincidence that ESG has gained such prominence lately.
We are talking about a society increasingly concerned with values such as sustainability, social responsibility and transparency in corporate management.
Many consumers abandon brands because of some harmful impact it has had on the environment.
And they do the same because they don’t identify with the ideals they defend or if they get involved in a corruption scandal, for example.
As a result, companies are becoming aware of the need to adapt to this new reality .
Being a sustainable company, which values good environmental, social and governance practices, is not (or should not be) a competitive advantage , but an organizational obligation.
Gradually, this transformation is taking place.
What Are The Global Initiatives Focused On Ensuring ESG By Companies
There are a number of initiatives that seek to encourage and ensure that companies follow ESG guidelines worldwide.
The vast majority are promoted by the UN.
Discover the main projects:
Paris Agreement
The Paris Agreement is a global treaty that was signed by several countries after the United Nations Climate Change Conference in 2015.
The main objective of the initiative is to combat global warming by reducing the emission of greenhouse gases and thus controlling the increase in Earth’s temperature by less than 2 degrees – preferably up to 1.5 degrees.
Global Compact
It is a voluntary agreement that was launched by the UN in 2000 to encourage businesses around the world to develop actions focused on sustainability and social responsibility.
The Global Compact has 10 universal principles, which deal with human and labor rights, environmental safety and anti- corruption .
All companies that are part of the agreement – today, there are thousands of them worldwide – must follow these guidelines and present a periodic report with the progress of the implemented measures.
Agenda 2030
It is yet another UN project, this one focusing on economic, social and environmental issues .
Formalized in 2015 with the participation of representatives from the organization’s 193 member states, the 2030 Agenda also expands on some goals established in 2000 in the Millennium Development Goals (MDGs).
Altogether, there are 17 objectives and 169 goals defined in the agreement , such as the eradication of poverty, ending hunger through sustainable agriculture, quality education, gender equality , reduction of social inequalities, among others.
Global Reporting Initiative (GRI)
It is one of the oldest measures, created in 1997, with the objective of standardizing balance sheets on the sustainability of companies.
The Global Reporting Initiative makes this assessment using the following global criteria: climate change, human rights, governance and social well-being.
Based on these four parameters, companies and governments are able to measure the impacts caused and present the numbers found in a more transparent way.
Principles For Responsible Investment (PRI)
As the name suggests, this initiative provides guidelines, based on the global sustainability agenda, to help companies include ESG principles when analyzing and making investments.
Created in 2005, the PRI also works with voluntary membership and already has thousands of signatory companies, which together manage more than 100 trillion dollars in assets.
Sustainability Accounting Standards Board (SASB)
In a way, the Sustainability Accounting Standards Council is somewhat reminiscent of the GRI, in the sense of helping to disseminate information on corporate business sustainability to potential investors.
However, unlike the first, which is focused on sustainable development itself, this initiative, created in 2011, is more focused on risk and materiality analysis in each specific area.
For this, the SASB uses 26 indicators , which are separated by five main themes:
- Leadership and Governance
- Business model
- Innovation and Environment
- Human capital
- Share capital.
What Is The Relationship Between ESG And Greenwashing?
To try to mask reports and have positive ESG numbers, some companies use a ruse called greenwashing , or “green makeup”.
Based on the lack of transparency in the disclosure of information, the company disguises certain data to convey a false idea of environmental responsibility .
With this, it tries to deceive its customers and attract investors.
Despite being recurrent, this harmful practice is increasingly with its days numbered.
This is because it was recently created in Europe, and with a tendency to spread around the world, the Sustainable Finance Disclosure Regulation (SFDR) or the Sustainable Finance Disclosure Regulation .
The idea is to better monitor ESG practices in companies and their applications in order to avoid the spread of fake news in any type of publication material.
ESG And Sustainability: What Are The Differences?
A lot of people end up confusing ESG and sustainability, which is natural, because they are strongly related subjects .
In practice, we can establish some differences that will help in understanding each term individually.
The first point we can make is that sustainability is a broader concept than ESG.
This is because it involves a complex and systemic analysis, which includes practical measures that go far beyond just trying to reduce environmental impacts, for example.
The ESG, on the other hand, brings more objective criteria, which help to qualify investment possibilities.
In general terms, we can say that companies need ESG to ensure sustainability in their operations.
Likewise, sustainability is essential for the ESG guidelines, which guide the performance of companies, to have a favorable opinion to investors.
In addition, it is possible to conclude that sustainability has an orientation from the outside to the inside, looking at the company’s bias, since it connects to the most different demands of a society.
ESG, on the other hand, are oriented from the inside out, as their role is to mitigate the impacts of the company’s actions and the operations of its production chain.
Examples Of ESG Companies
To reinforce that ESG is the acronym of the moment, more and more companies are being created to develop solutions in the environmental, social and governance areas.
The so-called “ESG techs” are already more than 700 in South America alone, according to the Inside ESG Tech Report , a report made by Distrito Dataminer.
We’ve separated three of the most innovative startups to look at in detail – each one focused on one of the pillars of ESG.
Check out:
Egalite
Focusing on the area of governance, as it encourages diversity within organizations , Egalitê is a startup that helps people with disabilities to be inserted into the job market.
In addition, it also requires companies to comply with the quota law for this category.
Created in 2009, this ESG tech has a platform that collaborates to create a more inclusive human resources sector for PCD, through the reduction of bureaucracy in processes.
Moss.Earth
It is an ESG Tech that develops actions in the environmental area, in order to reduce the impacts caused by companies.
Founded in 2020, Moss.Earth has developed a method of neutralizing harm through the purchase of carbon credits .
In this compensation system, all the money collected from the purchase of credits is transferred to sustainable initiatives.
Zenklub
Given the last pillar of ESG, Zenklub is a startup focused on the development of solutions aimed at the social area.
Created in 2016, the company offers well-being and emotional health services to company employees, such as therapists and psychologists, in addition to personalized content, such as exercise guides and tutorials.
ESG Courses
Another demonstration that ESG is a subject that is here to stay is that several courses and content on the topic are emerging, focused on different areas.
At Fundação Instituto de Administração (FIA), you will find a series of possibilities, from extension and postgraduate courses.
Learn more about the FIA ESG and Sustainability courses .
What Are ESG Investment Funds?
ESG investment funds are financial investments that invest in organizations focused on sustainability , which meet the criteria determined by the ESG metric – Environmental, Social and Corporate Governance.
In practice, its basis is similar to that of other equity funds, but the logic for choosing the companies that make up the ESG portfolios considers each of the three pillars explained above, exempting companies that do not comply with these premises.
Thus, even if a cigarette manufacturer elects a neutral Board of Directors and includes transparency measures regarding its finances , it could not form an ESG investment fund.
This is because its production activity is related to adverse effects on the health of customers – as smoking causes cancer and other diseases -, which harms the Social pillar.
In this case, the Environmental is also compromised, for example, by the smoke generated by cigarettes, which contributes to air pollution.
Following the same reasoning, a clothing manufacturer that works with ecological fabrics, clean energy, quality of life for employees and accountability to society has a high chance of being part of an ESG investment fund.
What Are The Reasons Why The Market Values Sustainable Investments?
Although, the importance given to sustainable investments is still not so great in other parts of the world, especially in Europe, it is undeniable that the market is already starting to look with different eyes at companies that invest in ESG.
After all, who doesn’t want to help promote organizations that are concerned with building a better world for the present and future generations?
All this, together with the promotion of important themes, such as diversity, inclusion, quality of life, ethics and environmental awareness, form a set of reasons that have helped to promote this type of asset.
What Are The Main ESG Indices On B3?
ESGs are types of ETF (Exchange Traded Fund) , that is, equity funds that use stock exchange indices as a reference.
In the case of ESGs traded on national territory, the transactions related to them are carried out within the scope of B3 (Brasil, Bolsa Balcão) – which is the largest stock exchange in Latin America.
At B3, the main ESG currently found are:
- Carbon Efficient Index (ICO2)
- Corporate Sustainability Index (ISE)
- Corporate Governance Index (IGCT)
- S&P/B3 Brazil ESG Index.
Next, we talk more about them.
Carbon Efficient Index (ICO2)
Through the Carbon Efficient Index (ICO2), B3 demonstrates which companies work to reduce the CO2 released into the atmosphere .
According to the stock exchange’s website:
“Companies joining the ICO2 demonstrate their commitment to the transparency of their emissions and advance the vision of how they are preparing for a low carbon economy.”
Carbon emissions are one of the main villains that contribute to the increase in the greenhouse effect, culminating in global warming and climate imbalance in different regions of the planet.
Remembering that the SDGs are part of the 2030 Agenda, a global commitment made by several countries during the United Nations Summit on Sustainable Development in 2015.
Corporate Sustainability Index (ISE)
Created in 2005, the ISE results from a broad analysis of the level of adoption of sustainable practices by companies , comparing their performance in 7 dimensions:
- Economic-Financial
- General
- Environmental
- Corporate governance
- Social
- Climate Change
- Product Nature.
Thus, companies that make up the ISE portfolio show a differentiated performance in terms of their economic efficiency, environmental balance, social justice and corporate governance, fully complying with ESG principles.
Corporate Governance Index (IGCT)
As the name suggests, the IGCT is dedicated to evaluating and highlighting companies that follow good governance practices, contemplating ethical principles and transparency in the relationship with employees, customers and investors.
What Are The Characteristics Of ESG Funds?
These equity funds offer interesting features for investors who want to diversify their portfolio without compromising large amounts.
In addition, of course, to meet the demand for the preservation of the planet, without leaving profitability aside .
See, below, three characteristics common to ESG funds – as they are called abroad.
Sustainable Business
More than a trend, sustainability is about the perpetuity and profitability of business today.
That is why many organizations are moving beyond the linear economy model, based on the irresponsible exploitation of environmental resources, to adhere to models that allow them to grow in harmony with nature .
They have also paid more attention to people and governance processes, increasing their efficiency by creating better solutions using fewer resources.
Lower Volatility
As a type of ETF, ESG has indirect exposure to the stock market, making it possible to invest in a number of companies from the same value.
This feature lowers the volatility of resources, offering greater stability when combining different yields.
In general, there are more volatile stocks alongside less volatile ones, so losses are usually offset by gains.
Profitability With Good Performance
If organizations focus on a purpose , prioritizing people and environmental causes, it doesn’t mean that profit is in the background.
On the contrary. In recent years, those who invested in ESG obtained an interesting return, as these companies are growing by optimizing their processes and building a positive image with the consumer.
Therefore, ESG funds are a good option to earn equity income.
Obviously, profit is not guaranteed, as fluctuations and risks are inherent to the stock market.
How Do Investments In ESG Funds Work?
To invest in ESG, you must contact a financial institution (brokerage firm or bank), which allows you to buy and sell shares on the stock exchange.
When choosing this stock fund, each investor provides an amount that entitles him to one or more shares of the companies that make up the portfolio, and his return will be proportional to what was contributed.
A manager is responsible for the ESG fund , carrying out the necessary movements to reduce risks and/or increase investors’ gains.
How Companies With ESG Funds Are Selected
Green seals and other recognitions granted by certifiers can help in the selection of companies that make up ESG funds, as well as a thorough analysis of their activities, balance sheet and projections.
But it is worth remembering that the selection for ESG funds depends on the index chosen for evaluation, but always gives preference to successful businesses in the spheres of governance, environmental and/or social.
While some chosen companies may excel in just one of the ESG pillars, it is common for them to adopt broad strategies to increase efficiency.
In other words, by including a culture of diversity, for example, an organization will soon realize the need for actions in the sphere of governance to improve internal communication and raise employee awareness.
Once everyone learns to respect different points of view , the environmental element can also enter the conversation.
The FIA held a webinar on the challenges for practicing ESG. Check it out here .
How Important Are ESG Investments?
From the moment that ESG investments begin to gain space in the financial market, significant changes occur that impact the logic of applications .
New values are being prioritized more and more.
In 2020, Larry Fink, CEO of the giant Blackrock investment fund, informed his clients in a letter that sustainability was now at the heart of their investment strategies .
He announced a number of initiatives such as:
- Stop investing in companies that affect sustainability, such as coal producers for thermoelectric plants
- Launch new investment products that filter fossil fuels
- Strengthen the commitment to sustainability and transparency in investment management activities.
From this example, which comes from a reference within the financial market, more and more companies have raised the flag of environmentally responsible initiatives .
After All, Is It Worth Investing In ESG Funds?
This question does not have a single answer as it depends on factors such as your investor profile , purpose , objectives and risk tolerance.
As we explained above, ESG funds support sustainability in companies, valuing natural and human resources to build a harmonious future .
So investing in them is a way to support that purpose.
However, even though they have less volatility than other equity funds, investing in ESG does not include certainties about earnings.
Hence the need to have some risk tolerance before choosing these funds.
Also consult information about the companies that make up the fund, liquidity in case you need to recover the amount invested in a short term and compare other options to make an assertive choice.
What To Consider Before Investing In ESG Funds?
In the previous topic, we mentioned that your purpose and investor profile should be considered before betting on any equity fund, including ESG.
In addition, we recommend that you learn about the risks, advantages and disadvantages of each fund, by consulting the document that summarizes its characteristics, called the prospectus.
With the prospectus in hand, you will even know the minimum amount to invest, the liquidity of each option , applicable taxes and fees and in which periods they must be paid off.
Another valuable tip is to gather data that allow you to anticipate scenarios about the ESG fund, such as the history of recent months and years.
