Understanding ESG, Its Components, and the Implementation

Nowadays, many companies realize the importance of a sustainable environment. One realization is the implementation of ESG (Environmental, Social, and Governance) in the company. To learn more about ESG, including the components and the implementation, read this article until the end!

What Is ESG?

ESG (Environmental, Social, and Governance) is a standard that must be implemented by companies eager to invest, ensuring they can balance environmental and social responsibility and business profit.

This concept ensures that the company has good governance to achieve its integrity. It must integrate the ESG factors in the decision-making process, including whether the decision will harm human rights and environmental sustainability.

By incorporating ESG principles, companies can find business possibilities, foster innovation, establish a work environment that upholds values, and encourage staff members to promote ESG principles.

ESG has a crucial role in the global business sector, making the Sustainability Accounting Standards Board (SASB) and Global Reporting Initiative (GRI) develop ESG standard reports that can help the company address the environmental and social impact resulting from the business process they undergo.

Then, how is the implementation in Indonesia? The government also supports the ESG application with Law Number 16 of 2016 about the Paris Agreement, Regulation of the President of The Republic Of Indonesia Number 59 of 2017 about achieving the sustainable development goals, Law Number 7 of 2021 and RUU PPSK about Carbon Tax and Carbon Trading, etc.

Additionally, for a variety of reasons, a large number of Indonesian businesses have adopted ESG. Out of 162 publicly traded firms, 95% of them adopted ESG due to their corporate values, and 91% did so to benefit the environment and society, according to Databoks.

Why Is ESG Important for the Company?

As explained before, ESG (Environmental, Social, and Governance) positively impacts society and the environment. However, beyond that, it can also help the company manage the financial risk and fulfill the investor’s needs.

Research published in Jurnal Ilmiah Ekonomi dan Bisnis revealed that overall, ESG disclosure significantly positively impacts the company’s performance reputation towards the stakeholders. Moreover, the higher the score, the higher the financial performance obtained by the company.

Furthermore, ESG can improve efficiency and productivity, reduce cost and loss, and facilitate business achievement. In addition, according to a survey held by PwC in 2021, 76% of consumers will stop doing business with companies that do not follow ESG principles.

Overall, it can be concluded that ESG can help the company build a reputation, create a positive impact on society and the environment, and contribute to sustainability.

ESG Components

ESG (Environmental, Social, and Governance) has three interrelated components: Environment, social, and governance. The detailed explanation of the three criteria and their relationship to the company is as follows:

1. Environmental

The environmental criteria encompass a company's energy consumption, waste management, pollution avoidance, behavior toward plants and animals, and natural resources conservation.

This component considers and lessens the company's environmental effects by employing clean energy, managing waste, and lowering emission levels from operational processes. Following specific environmental standards will create an ideal climate, helping the business continue operations and improve financial returns.

2. Social

Social criteria include the company’s relationship with external parties, such as suppliers, consumers, communities, the public, and so on. It also focuses on work safety, human rights, and social engagement.

3. Governance

Governance focuses on how an organization runs its internal components to provide the best results possible. This includes establishing accountability, transparency, integrity, and risk management policies.

Investors will consider funding your business if it is open, conforms with current laws, uses ethical business procedures, and does not act unethically.

The Example of ESG Implementation in a Company

Now, you already understand ESG (Environmental, Social, and Governance) and why it is important for a company’s sustainability. To learn more about the implementation, you can learn the examples in the Chandra Asri Group below.

Chandra Asri Group maintains its commitment to integrating sustainable practices and delivers low-carbon solutions aligning with ESG principles.

In the environmental criteria, Chandra Asri Group focuses on climate change and environmental performance. Moreover, for social criteria, Chandra Asri Group focuses on community engagement, product and chemical safety, occupational health and safety, employee and human rights, human capital, and development.

Furthermore, Chandra Asri Group focuses on sustainable supply chain and procurement, digital transformation, corporate governance, sustainable governance, and business ethics.

One of the frameworks applied in Chandra Asri Group is RESPONSIBLE. This framework is designed to meet stakeholder expectations, drive sustainable growth, and generate long-term value for all stakeholders. Here are the details of RESPONSIBLE:

Resources Circularity and Environment Management.
Energy Transition and Low Carbon Solution.
Social and Community Engagement.
Product and Chemical Stewardship.
OHS and Human Rights.
Nurture of Human Capital.
Sustainable Supply Chain
IT and Security Management.
Business Risk Management.
Liability on Corporate Governance.
ESG Communication and Stakeholder Engagement.

Additionally, the Chandra Asri Group also carries out some environmental management actions, such as greenhouse gas emission, waste, energy, air quality, material, and biodiversity management.

Those efforts brought Chandra Asri Group some awards, such as Top Rated Badge ESG Industry 2024, PROPER Emas, B score (Management) on Report Climate Change 2023 by CDP, is in the top 20–35% in the commodity chemicals subsector, and has a 2024 ESG risk rating of 16.3.

This is the information regarding ESG and how businesses use it. ESG is a standard that must be implemented for company sustainability as well as fulfilling social and environmental obligations.