Written by: Kenneth Fung
Date: 20/11/23
Environmental, Social and Governance (ESG) has become a focal point globally. In essence, it is a framework facilitating various stakeholders, including consumers, managers, and investors, to comprehend the risks and opportunities associated with environmental impacts, community relationships, and the accountability of the organization [1].
Evolution of ESG Reporting: From the UN's 'Who Cares Wins' to Mainstream Corporate Practice
It all began with a 2004 report published by the United Nations titled “Who Cares Wins”[2], featuring key recommendations for fostering improved investment markets and more sustainable societies across eight sectors (See Figure 1). In the present day, a total of 494 companies from the Fortune 500 report on ESG information, with 328 of them obtaining verification through standards like AICPA attestation or ISAE 3000 [3]. ESG credentials serve as a reflection of a firm’s business value, leading the way for long-term growth through stakeholder engagement.
The concept of ESG did not appear from nowhere. Its origin can be traced back to the longstanding practice of corporate Environmental, Health and Safety (EHS) standards, which companies have implemented in their businesses for decades. An example of this is the Occupational Health and Safety Act of 1970 launched by the US [4]. The development of EHS compliance lays the foundation for the development of ESG, fostering workplace safety through the elimination of environmental impacts and safety risks.
The Symbiotic Relationship Between EHS and ESG: A Holistic Approach to Sustainability
The roles of EHS professionals correlate with ESG practices. Trevor Bronson, the Director of Portfolio Strategy for Intelex, highlights that a significant portion of data for ESG reporting is sourced from EHS efforts, which EHS professionals have been doing for decades [5]. According to the Health & Safety Institute in the US, over 60% of EHS professionals have been approached to provide ESG data.
The Health and Safety at Work Act 1974 [7] is the first UK regulatory tool guiding companies in identifying and adhering to workplace health and safety standards. It outlines four essential categories [8]:
Adequate training of staff on health and safety procedures
Adequate welfare provisions for staff at work
Safe working environment that is properly maintained and safe operations
Provision of relevant instruction and supervision
Specifically, EHS indicators like air pollutants and toxic waste emissions, incident and fatality rates, hazard prevention policy, EHS training and education etc., align with the stipulations of this Act.
In comparison to current ESG rating agencies, the established metrics and materials exist within the EHS spectrum. Figures 2 and 3 illustrate the MSCI industry-based materiality map for the energy and utilities sectors [9]. While the prevalence of EHS-related issues varies across industries, both the ‘Environmental’ and ‘Health and Safety’ aspects consist of a fundamental part of ESG practices. For instance, the ‘carbon emissions’ component in the energy sector accounts for approximately one-fifth of companies’ ESG Ratings. Similarly, ‘Health & Safety’ in the social pillar also demonstrates its significance in evaluating corporate sustainability.
The existing Global ESG frameworks integrate EHS considerations. Global Reporting Initiative (GRI), which is currently headquartered in the Netherlands, consists of GRI Disclosures 403-1 to 403-10 focusing on Occupational Health and Safety [10]. Additionally, the Sustainability Accounting Standards Board (SASB), formatted a standardization on sustainability disclosures for 77 industries [11]. Take the aviation industry as an example; SASB outlines specific sustainability topics and metrics, encompassing Greenhouse Gas Emissions and Accident & Safety Management [12]. Therefore, the relationship between EHS and ESG underscores how the former created a preliminary platform for broader ESG initiatives.
In the evolving landscape of ESG considerations, the next pathway for companies’ EHS strategies could centre around enhancing employee wellbeing. It is particularly stressed in the current workforce, where Generation Z places a strong emphasis on achieving a work-life balance and prioritizing mental health. The interconnectedness of employee wellness with working efficiency, as well as overall revenue growth, is a forward-thinking concept that companies would have thought to implement.
Citations:
[1] ESG (Environmental, Social, & Governance). Corporate Finance Institute. (2023, October 26). https://corporatefinanceinstitute.com/resources/esg/esg-environmental-social-governance/
[2] Who Cares Wins - Connecting Financial Markets to a Changing World. (2004). https://www.unepfi.org/fileadmin/events/2004/stocks/who_cares_wins_global_compact_2004.pdf
[3] Harris, D. (2023, July 21). 99% of the S&P 500 is reporting on ESG and 65% are obtaining ESG Assurance. BDO.
[4] Osh Act of 1970. Occupational Safety and Health Administration. (n.d.). https://www.osha.gov/laws-regs/oshact/toc
[5] McLean, D. (2023, October 12). Collection and quality are top EHS and ESG Data challenges. Intelex Blog. https://blog.intelex.com/2022/11/15/research-reveals-collection-and-quality-as-top-ehs-and-esg-data-challenges/
[6] ESG and EHS: Similarities, distinctions, and Responsibilities. HSI. (n.d.). https://hsi.com/blog/esg-and-ehs-similarities-distinctions-and-responsibilities
[7] What are the main health and safety regulations?. Trade Union Congress. (2022, September 22). https://www.tuc.org.uk/guidance/what-are-main-health-and-safety-regulations
[8] The Health and Safety at Work Act explained. British Safety Council. (n.d.). https://www.britsafe.org/training-and-learning/informational-resources/the-health-and-safety-at-work-act-explained
[9] ESG industry materiality map. MSCI. (n.d.). https://www.msci.com/our-solutions/esg-investing/esg-industry-materiality-map
[10] Global Reporting Initiative. (n.d.). GRI 403: Occupational Health and Safety 2018 https://www.globalreporting.org/standards/media/1910/gri-403-occupational-health-and-safety-2018.pdf
[11] About Us. SASB. (2023, June 20). https://sasb.org/about/
[12] SASB Standards — Airlines (Version 2023-06).
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