What is ESG?
ESG, an acronym that stands for Environmental, Social, and Governance, represents a set of criteria that evaluate a company's commitment to ethical, sustainable, and responsible practices. These criteria encompass various aspects of a company's operations and impact, reflecting its dedication to a better world.
Environmental
ESG places a significant emphasis on protecting the natural world. Specific environmental themes include addressing climate change, reducing greenhouse gas emissions, preserving biodiversity, combating deforestation, managing pollution, improving energy efficiency, and responsible water resource management.
Social
In the social dimension, ESG directs attention toward people and their relationships. This encompasses efforts to promote gender equality, diversity, fairness, and inclusivity. It also involves initiatives aimed at enhancing customer satisfaction, employee engagement, supply chain management, and ensuring customer health and safety. Companies with higher profitability often possess more resources to undertake social responsibilities. Failure to meet these social expectations may result in increased costs and impact a company's cash flow. Representative profitability indicators include Return on Equity (ROE) and Return on Investment (ROI).
Governance
In the realm of corporate governance, ESG seeks to transcend traditional methods of organizational governance and strengthen corporate governance practices. Specific themes include board composition, cybersecurity practices, management structures, executive compensation, anti-bribery and corruption measures, shareholder rights, stakeholder engagement, and relationship governance. Corporate governance levels can be gauged through operational performance. Key performance indicators include inventory turnover ratios and product sales ratios, which represent the quality of a company's governance.
Why Focus on ESG?
For Companies
As society progresses, entrepreneurs worldwide are increasingly recognizing the importance of sustainable development, giving rise to the ESG movement. For businesses, adhering to ESG development norms is also a contribution to global sustainability.
As the ESG movement gains momentum, more overseas customers and investors are gradually incorporating ESG as one of the assessment criteria for their partners. Overseas customers prefer to collaborate with partners who share similar principles when it comes to business development. Additionally, countries have implemented policies providing incentives to companies in alignment with ESG-related goals. OtaraPack exemplifies this commitment and has earned the trust of numerous businesses as a result.
ESG Premium and Investment Financing
The ESG premium is the additional price paid for companies or assets that perform well in terms of environmental, social, and governance (ESG) factors. The ESG premium occurs because more investors recognize the importance of ESG factors in a company's long-term value and sustainability. These investors believe that excellent ESG performance can provide better risk management, innovation capability, and long-term growth potential. Hence, they are willing to pay a higher price for companies with good ESG performance.
The size of the ESG premium may vary depending on the market and the level of attention investors pay to ESG. Some investors may actively choose to incorporate ESG factors into their investment decision-making process and find companies with good ESG performance more attractive. This can lead to an increase in the stock price or asset price of these companies, forming an ESG premium.
In conclusion, the ESG premium is a phenomenon where investors are willing to pay an extra price for companies or assets with good ESG performance, reflecting the market's emphasis on ESG factors. This phenomenon is becoming more common in an environment where ESG investing is gaining popularity.
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