Navigating ESG Terminology: A Deep Dive into Key Concepts for Sustainable
Blog 8 mins
In the ever-evolving landscape of sustainable business, understanding ESG terminology is crucial. We recognise the importance of clarity in driving informed decisions so in this blog, we discuss five common ESG terms to provide you with a greater understanding of their significance and the possible implications for your business.
Read on to find out about key terms including scope 1, 2 and 3 carbon emissions, greenwashing and the circular economy.
1. ESG: Environmental, Social, and Governance
ESG is a cornerstone of sustainability business practices. It’s an acronym that represents three fundamental pillars:
Environmental: This refers to an organisation’s environmental impacts and risk management practices. This includes both direct and indirect greenhouse gas emissions, energy consumption, supply chain impacts and waste management and the firm’s overall resilience against physical climate risks such as flood, supply chain disruption etc. Businesses with a robust environmental strategy prioritise reducing their carbon footprint, protecting and restoring biodiversity, and mitigating negative supply chain impacts.
Social: This pillar refers to a company’s relationships with stakeholders and society at large. It involves fair labour practices, diversity and inclusion, along with the organisations impact on the community and wider society in which it operates. A vital aspect of ESG involves social impact expectations and how they are extended to supply chain partners, particularly those where operations occur in countries where environmental and labour standards may be less robust.
Governance: This evaluates corporate governance, ethical business practices, risk management and adherence to regulations. Strong corporate governance ensures transparency, accountability, and fair decision-making. It also considers aligning executive compensation with sustainable performance.
These pillars, whilst distinct, are inherently interconnected, reflecting the multifaceted nature of sustainability. Whilst it’s essential to understand each pillar’s individual significance, it’s equally vital to recognise their symbiotic relationship. ESG is not about isolating one aspect, it’s about embracing an integrated approach that acknowledges the collective impact of environmental consciousness, social responsibility, and ethical governance. This perspective ensures that businesses acknowledge a variety of sustainability challenges and opportunities in the short, medium and longer term, making ESG a comprehensive framework that guides organisations to a more sustainable future.
2. Carbon Emissions and Scope Breakdown
Carbon emissions, or carbon footprint, equals the amount of greenhouse gases a company emits into the atmosphere. Measured in carbon dioxide equivalents (CO2e), this metric includes the 6 Kyoto Protocol gases; carbon dioxide (CO2), methane (CH4), nitrous oxide (N20), hydrofluorocarbons (HFCs), perfluorocarbons (PCFs) and sulphur hexafluoride (SF6).
Scope 1, 2, and 3 Emissions:
Scope 1 Emissions: These are direct emissions from sources that a company owns or controls. Examples include emissions from on-site fuel combustion, company-owned vehicles, and industrial processes.
Scope 2 Emissions: Scope 2 are indirect emissions from the generation of purchased energy consumed by the company. This includes electricity, heating, and cooling that the company uses.
Scope 3 Emissions: Often considered the most complex and far-reaching, Scope 3 emissions account for all indirect emissions that occur in the upstream and downstream activities of an organisation. This includes emissions from suppliers, transportation, product use, and disposal. According to Science Based Targets, Scope 3 emissions are on average 11 times higher than direct (Scope 1) emissions and reflect >70% of total emissions.
Absolute vs Intensity Emission Targets:
Absolute emissions targets focus on reducing a fixed quantity of emissions, usually measured in units like metric tons of CO2 equivalent (CO2e). These targets are compared to a specific baseline year, providing a straightforward measure of emission reductions over time. For example, a company might commit to reducing its total greenhouse gas emissions by 20% compared to its emissions in the year 2019.
Emissions intensity targets, on the other hand, are relative to a specific metric such as economic output or operational activity. These targets involve reducing emissions per unit of output, ensuring that emissions decrease as productivity or operational activity increases. For instance, a business might aim for a 13% reduction of CO2e per tonne kilometre when shipping goods.
Both approaches have their merits and can be used by companies to align their sustainability goals with their business objectives.
The Significance of Scope 3 Emissions:
While Scope 1 and 2 emissions are more directly controlled by the company, Scope 3 emissions represent a larger portion and often extend beyond a company’s operational boundaries. These emissions are influenced by a company’s purchasing decisions, product design, and customer behaviour. For example, a retail company’s Scope 3 emissions might include emissions from manufacturing, transportation, and disposal of the products they sell.
Recognising the importance of Scope 3 emissions is essential for a comprehensive sustainability strategy and that’s where our sustainability solution, Leaf can support your business. Addressing these emissions requires collaboration with suppliers, customers, and other stakeholders in the value chain. By minimising Scope 3 emissions, companies can achieve a more holistic reduction in their overall carbon footprint.
Greenwashing is the act of presenting a deceptive or inaccurate portrayal of a company, giving the impression of being environmentally conscious when, in fact, the company’s practices may not align with such claims. This behaviour can mislead customers and investors to boost their image and improve sales by seemingly aligning with sustainable values. To avoid greenwashing, businesses must ensure that their claims are clear, relevant and substantiated by accurate data. Here in the UK the Competition and Markets Authority (CMA) has published the Green Claims Code, which states that firms making green claims “must not omit or hide important information” to reduce the risk of misleading shoppers. Transparent reporting, clear communication, and authentic commitment to sustainable practices are essential to maintaining credibility.
In addressing the challenge of greenwashing, investor-grade ESG data emerges as a robust solution. This data empowers companies to provide comprehensive insights into their environmental, social, and governance practices, offering a genuine representation of their commitment to sustainability. Going beyond surface-level claims, this data equips investors with a holistic view of a company’s initiatives. Through transparent and standardised reporting, investor-grade ESG data enables prospective investors to make well-informed decisions, promoting accountability and minimising the potential for greenwashing. This approach not only safeguards a company’s reputation but also contributes to the establishment of a robust sustainable and responsible business model.
You can read more about how to avoid greenwashing here.
4. Supply Chain Transparency
Supply chain transparency involves revealing the inner workings of a company’s supply chain, from sourcing raw materials through to delivering the final product. Transparent supply chains enable businesses to identify potential exposure to risk, ensure ethical practices, and enhance accountability. By tracing the origin of materials, assessing supplier practices, and disclosing environmental and social impacts, businesses can make informed decisions that align with their sustainability goals.
Transparency and Traceability:
While closely related, transparency and traceability represent distinct concepts within the context of supply chain management. Transparency focuses on openness and accessibility, allowing stakeholders to access relevant information about the supply chain’s processes, practices, and impacts. On the other hand, traceability emphasises the ability to track the journey of products or materials throughout the supply chain, enabling the identification of sources, routes, and changes over time.
Both transparency and traceability play indispensable roles in fostering responsible and sustainable supply chains. Transparency ensures that information is available for assessment and scrutiny, encouraging ethical practices and minimising the potential for hidden risks. Initiatives like the Fashion Revolution’s Transparency Index highlight the importance of transparent practices in industries. Meanwhile, discussions about the EU product passport emphasise traceability’s role in enhancing accountability, quality control, and responsiveness. These measures empower consumers and industries towards greater sustainability. The Fashion Revolution’s Transparency Index assesses brands based on their policies, practices, and impact, encouraging transparency. Similarly, the proposed EU product passport standardises sharing product information across member states, enhancing traceability. These efforts collectively foster resilient supply chains, prioritising ethics and informed choices.
In the realm of sustainability, the synergy between transparency and traceability is vital. Transparent supply chains enable consumers, investors, and regulators to gain insight into a company’s commitments and actions, fostering trust and promoting responsible consumption. Meanwhile, traceability ensures that products meet quality standards, reducing waste, supporting ethical sourcing, and contributing to overall environmental and social integrity. The harmonious interplay of these principles propels businesses toward a more sustainable and ethical future.
5. Circular Economy
The circular economy is an innovative economic model that prioritises resource efficiency and sustainability, in contrast with the traditional linear “take, make, dispose” approach. In a circular economy, products are designed for durability, repairability, and recyclability, following the principles of the waste hierarchy which prioritises; reduce, then reuse, then recycle. The goal is to remove waste and extend the lifespan of products through practices like recycling, upcycling, repair and remanufacturing. This approach conserves resources, reduces environmental impact, and creates new jobs in the circular economy.
Central to the circular economy philosophy is the concept of regeneration and rejuvenation. The emphasis on durability means that products are engineered to withstand extended usage periods, reducing the need for frequent replacements and curbing the excessive consumption of resources. Repairability is another key tenet, encouraging the development of products that can be easily maintained and repaired by consumers or specialised technicians. This reduces the incidence of premature disposal and ensures that products remain functional after continuous wear and tear.
Recycling, upcycling, and remanufacturing are also integral processes in extending the life of materials and products. The practice of recycling allows for the recovery of valuable materials from discarded products, which can then be reintroduced into the production cycle, curbing the demand for virgin resources. Upcycling takes recycling a step further, transforming waste materials into products of higher value or utility. Remanufacturing involves refurbishing used products to their original specifications, breathing new life into them and minimising the need for completely new replacements.
By embracing the principles of the circular economy, society can pave the way for a future characterised by reduced resource consumption, diminished waste generation, and heightened economic resilience. Not only does this model alleviate the pressure on dwindling resources, but it also significantly curtails pollution, energy consumption, and carbon emissions. The circular economy’s profound impact stretches beyond environmental considerations, influencing economic stability and social well-being.
As you continue your sustainability journey, a solid grasp of these key ESG terms ensures you make well-informed decisions that align with your company’s values and objectives. At CORE, we’re committed to guiding you through this path, offering sustainability solutions such as our Leaf platform that consolidate ESG metrics for impactful decision-making. To find out more about Leaf and how it supports businesses in improving their sustainability performance, please get in touch.
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