What is ESG and Why is it Becoming Increasingly Important for Companies?

In the past few years, there has been a strong increase in ESG reporting requirements around the world. ESG stands for Environmental, Social, and Governance. They are a set of standards for a company's operations that have become a popular way to indicate a firm’s sustainability performance. There are various issues reported by companies under each of the three pillars, comprising a variety of metrics. The environmental criterion considers how companies manage their environmental impact and use resources. Some of the factors include greenhouse gas emissions, water use, land-use, biodiversity, pollution management, and climate change adaptation. Social criteria focus on how the company fosters its people and engages with the wider society. Examples of social criteria include workforce diversity and inclusion, community engagement, customer satisfaction, and human rights. Governance considers the company’s internal system of practices and policies. Factors include business ethics and code of conduct, risk governance, supply chain management, and tax strategy.

Categories Business & Finance

How does European Carbon Trading Work?

‘Carbon trading’, ‘emissions trading’ or ‘carbon markets’ refer to an approach to reducing greenhouse gas emissions, which turns the right to emit greenhouse gases into a commodity with economic value. This approach is called a ‘cap and trade system’, in which a ‘cap’ or upper limit on greenhouse gas emissions is chosen, and then an accordant number of permits is distributed among emitters (any companies in the industries targeted by a system). Emitters can only emit the amount of CO2eq (CO2 or equivalent) specified by the number of permits they have, else they receive a financial penalty. The cap is designed to limit emissions, whilst the ‘trade’ part of the mechanism is implemented for economic reasons.

The Social Discount Rate

The Social Discount Rate (SDR) represents the value we place on the welfare of future generations and consequently the cost that society today should bear for future generations - a low SDR places a similar value on future generations’ welfare as on current ones, a high SDR does the opposite. A high SDR used in policymaking results in much less money being spent on climate action today.  An example of different discount rates being used in climate models can be seen in the Stern vs Nordhaus debate, whereas Nordhaus used a high and Stern a low discount rate. 

Categories Economic Concepts