What is an Environmental Assessment?
An environmental assessment is conducted to assess company risks and to determine whether a company fits environmental, social, and governance (ESG) criteria.
What is ESG?
Environmental, social, and governance (ESG) is a set of criteria that socially conscious investors use to qualify a company as a potential investment. This type of investor will screen out a company if it does not meet the desired standards.
The environmental portion measures how a company operates in respect to preserving the climate. We’ll discuss these criteria in more detail in the following section.
The social criteria measure a wide range of factors relating to social relationships. Factors in this category include a company’s stance on human rights issues, charity donations, customer relationships, and mission statement in regard to social responsibility. Employee relationship factors like employee training, diversity policies, and compensation are also considered.
The governance criteria accounts for how a company’s executive members serve the interest of others including shareholders, customers, employees, and the community. A company that slashes community service funding while giving its board of directors enormous bonuses would cause a negative impact on its governance credibility.
What does an environmental assessment account for?
The environmental factors for ESG are broken down into 4 major components: environmental opportunities, pollution and waste, natural resources, and climate change.
Regarding environmental opportunities, environmental assessments measure a company’s ability to improve energy efficiency, implement green building practices, and use clean technology.
Assessments measure a company’s ability to reduce electronic waste, solid waste, packaging material, water pollution, and toxic waste.
For the natural resources portion, assessments measure how companies source raw materials, eliminate deforestation, responsibly use land, protect ecosystems and biodiversity, and conserve natural resources like water.
For climate change factors, an environmental assessment looks for companies that decrease fossil fuel use and carbon emissions, reduce greenhouse gas emissions, and finance environmental impact. It also measures a company’s climate change vulnerability and favors companies developing renewable energy solutions and those improving their carbon footprint.
How does an environmental assessment help a company?
Environmental assessments don’t only help socially conscious investors determine if a company is worth investing in. They also help the companies assessed avoid risks and spot open opportunities.
Environmental catastrophes like explosions and oil spills can destroy a company’s shareholder value, ruin its reputation, and subject it to regulatory penalties or criminal prosecution. An assessment can help address these risks before they happen and allows companies to develop a plan to prevent them.
An environmental assessment can also be used by a board of directors to evaluate the risks of mergers and acquisitions, as well as ventures. This can save a company from acquiring one with a number of environmental liabilities.
Environmental assessments measure a company’s ability to be responsible regarding environmental opportunities, pollution and waste, natural resources, and climate change. They are used by socially conscious investors to determine if a company fits environmental, social, and governance (ESG) standards. Environmental assessments also help companies evaluate potential risks and identify areas they need to improve upon.