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Brain circuits

Have you considered the actual relationship between E, S, and G?

Published 23 November 2021 in Brain circuits • 2 min read

While most companies are jumping on the ESG bandwagon, many gaps remain between what companies say and their actions. One of the barriers to real action may be a lack of understanding on how these goals are interrelated. Before your business can craft an effective ESG strategy, it is first necessary to fully understand the relationship between the E, the S, and the G.

The meaning of ESG

The EU defines ESG as follows:

E: Environmental considerations: These might include climate change mitigation and adaptation, as well as the environment more broadly, for instance the preservation of biodiversity, pollution prevention, and the circular economy.

S: Social considerations: This could refer to inequality, inclusiveness, labor relations, investment in human capital and communities, as well as human rights issues.

G: Governance: This refers to both public and private institutions, including management structures, employee relations, and executive remuneration. It plays a fundamental role in ensuring the inclusion of social and environmental considerations in the decision-making process.

The relationship between these goals

In the broad discussion of these goals, social considerations are often the forgotten stepchild. People focus on the environmental concerns and how corporate governance can influence change ors failing to do so. But rarely do people look at the relationship between environmental and social concerns. In fact, more than two-thirds of participants in our IMD webinar indicated they believed there was a positive correlation between environment goals and social objectives. However, the opposite is often true.

Consider the yellow jacket protests in Paris. When carbon taxes were imposed on the French public, it sparked these demonstrations. While the intent was to incentivize people to change their behavior, the burden disproportionately affected low-waged workers who live outside of Paris and rely on their cars to drive in and earn their livelihoods. These problems occur when we do not consider the social impact of environmental incentives, which often present differently for different socioeconomic groups. When you consider people who live from pay check to pay check, or even day to day, the choice between putting food on the table or doing the environmentally correct thing is clear.

So, when you sit down to evaluate your strategy, make sure you consider how your goals for one aspect of ESG may affect the others.

For more on this topic, you can view our recent webinar here.

 

Authors

Christos Cabolis

Christos Cabolis

Chief Economist at the IMD World Competitiveness Center

Christos Cabolis is the IMD World Competitiveness Center’s Chief Economist and Head of Operations. He is also Adjunct Professor of Economics and Competitiveness at IMD. His research focuses on competitiveness in its broadest sense, such as the challenges inherent to ESG and the need to respect citizen privacy in an increasingly digitalized world.

Karl Schmedders - IMD Professor of Finance

Karl Schmedders

Professor of Finance at IMD

Karl Schmedders is Professor of Finance at IMD. In his research, he applies numerical solution techniques to complex economic and financial models, shedding light on relevant market issues and industry problems. He is also Director of IMD’s new online certification course for structured investment products in partnership with Swiss company Leonteq, teaches in the Advanced Management Concepts (AMC) and Executive MBA programs, and is an advisor on International Consulting Projects in the MBA program.

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