The term ESG (Environmental, Social and Governance) describes the different non-financial factors impacting an organisation’s performance in the long run. Environmental issues such as wildlife preservation and pollution often get featured in ESG discussions, in addition to social factors such as wage disparity and unemployment rates. Governments also contribute to ESG by setting labour policies and environmental standards for businesses. Over the last few years, ESG has become a necessary business management process rather than being treated as a different issue. ESG rating helps a company better understand the areas where it is more likely to impact positively.
Wondering how climate change can impact ESG research? Here are the details one must know.
Role of climate in ESG
Climate is a significant component of ESG as it predominantly affects human health through malnutrition, starvation, infectious diseases, loss of livelihoods and even loss of human life. Climate change leads to extreme weather-related events such as droughts, floods, wild fires and social unrest. It may also increase forced migration from specific areas, leading to immigration issues and increased crime rates.
Effects of climate change on the business sector
Climate change massively affects the business sector. For instance, severe weather conditions such as droughts and floods damage equipment and property. Temperature changes, natural disasters and excessive rainfalls lead to typhoons and hurricanes that destroy agricultural yields, leading to an inflation in food prices and financial crisis for those who depend on the farming industry. A spike in wildfire incidents reduces timber supply, which affects profit margins of companies operating related businesses. In order to avoid such dangerous consequences, companies could take action to minimise the impact of climate change and use it as an opportunity for future growth.
The battle against climate change demands a significant amount of money, time and resources. Businesses must consider investing in eco-friendly energy sources, increasing their recycling efforts and reducing their materials’ environmental impact. Companies must include ESG considerations in their business’s long-term goals and plans, offering sustainable growth opportunities.
How does ESG investing affect climate change?
ESG investing may negatively or positively affect climate change, depending on the investment’s level of environmental sustainability. If the investments focus on businesses that increase pollution, it may negatively impact climate change. On the other hand, investing in ESG-friendly companies will bring positive effects on climate change.
This is where climate-related financial disclosures acquire significance. These are statements an organisation makes to convey the risks of climate change on its finances. They include revealing any physical effects of climate change, announcing their risk management strategies to deal with climate issues and explaining how the change will positively or negatively affect the business’s future earnings.
Role of humans in climate change
ESG research and investing are significant because it helps boost financial returns, while mitigating any negative ESG impacts. It positively affects the environment and society and increases returns on investment. Although climate change is long-term process, certain human activities, such as burning fossil fuels to gain energy, clearing lands and cutting trees, could accelerate the process. It accelerates the global warming process to an uncomfortably acceptable speed.
It is evident that the earth has become warmer these days, compared with pre-industrial times. The CO2 levels have also increased significantly over the last couple of centuries. The rate of climate change has exponentially grown over the last few decades due to the extraordinary rate of fossil fuel combustion.
Benefits of ESG investing
ESG investing has a lower risk level than investing in traditional assets since it involves putting money in companies adhering to stricter environmental sustainability, governance policies and diversity guidelines. ESG investing is crucial because it saves the environment, increases equity and slows down climate change. Happy people mean happy earth. Therefore, ESG investing is a valuable tool that each investor can use to minimise greenhouse gases, push innovation towards sustainability and provide a decent wage to everyone. ESG investing can make the world a better place for all as it will reduce global warming and positively affect climate change.
ESG research focuses on climate-related financial disclosures to address the involved risks and identify sustainable investments. Understanding the impact of climate change on ESG investing helps make informed decisions while minimising the climate crisis.