A missing "G" in ESG? - an emerging case for integrated environmental, social and governance analysis

This page in:

ImageGovernance issues are prominent on the development agenda - as exemplified by the recent G8 focus on transparency or in discussions of the post 2015 agenda. However, at least among most donors, the governance aspects are dealt with separately from discussions of social or environmental (or even economic) aspects. Is this a useful distinction? Or are we missing a trick from the financial and private sectors in not developing integrated environmental, social and governance (ESG) approaches?

The trend towards an integrated ESG approach began in the last decade with impetus from private sector investors. It linked to efforts to frame a more comprehensive view of sustainability in which the IFC played a valuable role. The wider financial sector followed suit.

An influential 2005 report commissioned by the United Nations Environment Program called for integration of the three dimensions into institutional investing as a fiduciary duty. The ESG framing is at the heart of the Principles for Responsible Investment. The UN Secretary-General launched it in April 2006 at the New York Stock Exchange. By 2008, a survey of 350 global investment professionals conducted by AXA Investment Managers and AQ Research, concluded that ESG was the preferred term for the responsible investment sector. ESG factors have become more valued factors in investor decision making. A 2012 survey by PricewaterhouseCoopers on behalf of the Principles for Responsible Investment found growing prevalence of ESG analysis in investor due diligence and highlighted the growing influence of ESG factors in securing deals and on valuations.

While the focus of the "G" was originally more targeted towards corporate governance aspects, the focus has expanded to consider management of a broader range of governance risks. For example, at the recent EITI Global Conference, David Diamond, Global Co-Head of ESG at Allianz Global Investors, noted how investors increasingly consider such factors as whether a firm is committed to relevant voluntary governance initiatives such as EITI. They want to see awareness of transparency, accountability, and anti-corruption issues among corporate management.

For many businesses, at least in those sectors that deal with significant external risks, such as extractive industries, the creation of integrated ESG departments has become increasingly standard. Many firms are repositioning corporate responsibility reports as ESG reporting. Looking at my inbox for the past week alone, I have received three newsletters and announcements specific to "ESG" issues – a watchdog-style digest of ESG corporate issues, a mining company presentation of innovative ESG approaches from a recent conference, and an investor report.

This trend makes sense, particularly from the risk management perspective. Why not seek to address non-technical risks as a collective given how much they interrelate? Bringing corporate staff dedicated to those issues into one group should promote better communication and shape more informed targets, approaches and reporting. IFC has followed the lead of investors and industry and has an integrated group, including ESG and industry standards advisory services.

Does this also make sense for the range of development agencies? Rearranging the organizational boxes is less practical within the complex structures of most agencies. However, at least from a project risk perspective, a more integrated ESG perspective could yield benefits, informing project design and providing a more comprehensive basis for review, even if the focus is on development impact, not financial return.

The integration approach might be extended to products, too. An example might be the Strategic Environmental and Social Assessments (SESAs). It is encouraging to see growing government demand to conduct such assessments, which have proven their value in drilling down to underlying dynamics. When they get underway, many of the issues raised by stakeholders are governance related, leading to incorporation of those dimensions into the assessment process. One of the early SESAs in Sierra Leone (click here for final report) identified core social and environmental priorities for the mining sector, such as relocation, child labor, and deforestation, but then recognized the need to look at political economy aspects, institutional capacity, local governance structures and disclosure practices in identifying areas for progress. The latter all draw on the governance field.

One could argue that this is all good and that one should not worry about the terminology. Yet, there can be some value in making the connections explicit. The SESA approach is itself an evolution from the Strategic Environment Assessments. A Social, Environmental and Governance Self-Assessment (SESGA) might be a next step - potentially enabling more comprehensive treatment of all three dimensions from the beginning and ensuring that the appropriate linkages are drawn. One down side might be that governance issues can be a more sensitive entry point than social and environmental and hence it is better to allow those issues to emerge organically.

What is sure is that we will see increased flows of public information from governments, companies and donors alike for critical sectors. There will be more data to draw upon whether as a policy maker, operator or lender. Analysis combining the environmental, social and governance components can yield insights towards ensuring greater value and development impact.


Authors

Michael Jarvis

Executive Director, Transparency and Accountability Initiative

Join the Conversation

The content of this field is kept private and will not be shown publicly
Remaining characters: 1000