As Corporate Social Responsibility, more commonly known as CSR, is increasingly linked to profitability and long-term social acceptance, shipping is starting to look deeper into the importance of the closely linked concept of ESG.
The Poseidon Principles, a global initiative among financial institutions aiming to improving the role of maritime finance in addressing global environmental issues, was a great recent example of how sustainability is identified with profitability. But what is ESG? Why is it different than CSR? Why it matters for shipping?
Let us take the things from the beginning. CSR refers to the total of responsibilities among companies to meet the needs of society and their stakeholders, but also extends to the responsibility of these stakeholders to hold firms to account for their actions. These stakeholders -broadly defined as any party who affect and are affected by a firm’s operations- are a topic on their own as they often have contradictory needs and demands, especially in shipping which is characterized by a particularly complex network of operations and interactions.
ESG vs CSR
A typical area of confusion is the difference of ESG to CSR. While both terms describe the societal responsibilities of the organization, CSR describes, in more theoretical-qualitative terms, the accountability of companies regarding their social commitments. Meanwhile, ESG helps these social efforts to be quantifiable, so more easily measured. More specifically, ESG describes the criteria that investors use to evaluate a company and determine if they are worth investing in.
Understanding ESG
ESG stands for Environmental, Social and Governance factors assessing the progress of companies on their CSR. The ESG was established as late as 2005, when the UN Environment Programme Finance Initiative and the UN Global Compact launched the Principles for Responsible Investment Initiative (PRI), which has turned into the world’s leading proponent of responsible investment for enabling the companies to understand the investment implications of ESG factors. ESG reports seek to unveil performance on three areas that are important for the company’s operation:
Environment: Green sustainability is a more and more relevant topic for every business as the world is struggling to get in line with Paris Agreement. For instance, although shipping is less polluting than respective modes of transport, like trucks or aviation, it is still accounting for more than one billion tonnes of GHG emissions each year. ESG reporting in maritime covers GHG emissions, but extends to more topics such as recycling, waste management, energy efficiency, etc.
Society: This pillar covers business ethics and a wide range of potential societal obligations, such as human rights, diversity, labor standards, animal welfare, and more routine issues, such as adherence to workplace health and safety with accident and safety management. This is where the ‘social license to operate’ (SLO) also applies, which expresses the acceptance of a company’s practices by the public.
Governance: This has to do with a set of rules or principles defining rights, responsibilities and expectations between different stakeholders in the governance of the companies.
Why ESG matters?
It becomes evident that, in such a complex industry, there are several ESG elements that can be considered, not only in the stressing environmental concerns, but also in fields of seafarers’ rights, cargo safety, and many more. In accordance with the industry’s challenging nature, an ESG analysis of shipping organizations could unveil numerous risks, varying from environmental footprint to employee health and safety.
#1 More than reputation: Business communication sees companies’ responsible behavior as a valuable asset for their legitimacy and long-term survival. CSR and ESG are about creating a strong organizational culture which boosts employees’ engagement and retention creating a positive impact for the organization as a whole, extending of course to its social image.
#2 Financially beneficial: A socially responsible firm is also seen as positive news from investors and partners. The measurable considerations of challenges and opportunities, enabled by ESG, provide a significant advantage for making strategic decisions and consequently achieve long-run success, thus always being appealing to investors and potential partners.
#3 Safe environment for all: The above two factors make up an ideally secure working environment, both in terms of efficient productivity through happy employees and of the organization’s social image. This creates a condition where being socially responsible makes financial sense for maritime organizations and every other business that wishes to thrive in the long run.
Except for ensuring CSR transparency towards external stakeholders, ESG reporting most importantly indicates that a shipping organization has strategies in place in order to handle any ESG risks and opportunities. And while the time has not yet come for a sustainability revolution in the sector, there are still many courses ESG investors can chart in order to push for green and social progress in this critical sector.
Did you know?
The key stakeholders of a shipowning company often include, but are not limited to:
- Customers: Depending on the exact nature of shipping organization, customers in a ferry are of course passengers, while customers in a B2B shipping firm can be ship operators, charterers, and many more.
- Employees and seafarers: Workforce is often overseen as a major stakeholder group affecting an organization’s outcome, despite being those who spread the word of the organization’s values.
- Regulators: IMO and flag states set the rules which define the nature of shipping operations from one place of the globe to another.
- Ports and terminals: Stevedores and terminals are responsible for loading and unloading ships, as well as storing cargo in the port.
- NGOs: Typically involved in exposing facts and holding big corporations accountable for their actions, NGOs can have a huge impact in an organization.
