Many organisations and investors initially deemed the concept of Environmental, Social, and Corporate Governance (ESG) unnecessary because of the heavy additional costs involved. However, this stereotype was challenged when BNP Paribas reported that sustainable equity indices have outperformed standard non-sustainable benchmark stock indices.
Notably, the MSCI World Socially Responsible Investing index has witnessed a 14.1% compound annual growth rate in returns since 2016, which is 1.1% higher than the MSCI World benchmark. This achievement is simply the tip of the iceberg; ESG-centered businesses have been profiting and thriving in various ways, thus thrusting ESG into the spotlight and proving its value.
What is ESG?
ESG is the consideration of environmental, social, and governance factors at play in a business’ processes or investment decisions. To add, the following describes each factor in greater detail:
- Environmental – This factor helps to analyse any environmental concerns or issues that an organisation faces and the ways in which it is being managed. This includes the environmental sustainability efforts and sources of energy used by a company, amongst other topics. For instance, if a company often burns excessive amounts of fossil fuels, it may fail to fulfil the environmental factor and thus result in investors losing interest in the company.
- Social – The social factor regards the relationships between the company and every party they interact with. In this case, it looks at criteria such as whether the company has business dealings with other businesses that share similar values, pro-activeness in giving back to the community, and good employee welfare.
- Governance – In terms of governance, investors would be interested in knowing and understanding a company’s accounting methodologies and standards; and the ability of a stockholder to weigh their opinions on important decisions.
Overall, ESG is a holistic framework that measures whether a company cares for the environment, has good values and associates with like-minded entities, practices compliance, and abides by the law.
Compliance, ESG and RegTech
In accordance with the previous point, ESG is very much linked to the compliance industry these days. There is tremendous pressure on the industry to heighten efforts to become increasingly ESG-centred. However, they face issues in dealing with the environmental and social factors; simply because there is no clarification at this point on how such an industry could incorporate these factors. This is not to discount the fact that they excel in fulfilling the criteria set by the governance factor, since compliance was built upon it.
RegTech encourages industry and regulators to implement more thorough and practical ESG rules as it increases the transparency and consistency of regulatory processes. This would then make the areas of lack apparent, thus encouraging businesses to think about how they can better serve environmental and social well-being, while fully abiding by the criteria within the governance factor.
Regtank and ESG
With each passing day, Regtank is working to increase our efforts in transforming into the epitome of an ESG-centred company, ensuring that we improve sustainability and are in line with international authorities, such as the Financial Action Task Force (FATF).
With ESG being one of our core considerations, we aim to provide quality services for our clients. Contact us today at email@example.com to understand how we can work together towards achieving ESG goals!