ESG Selected Works | A Business Survival Guide in the Face of Climate Change | In-depth Analysis of "Climate Change Adaptation" (Part One)

The latest recommended book introduced by LINK-ESG is "Climate Change Adaptation, Governance and New Issues of Value: Measuring the Impact of ESG Scores on CoE and Firm Performance", co-authored by Carlo Bellavite Pellegrini, Laura Pellegrini, and Massimo Catizone. The book explores the importance of sustainability, corporate social responsibility, climate change adaptation, ESG scores, and their impact on business value and growth. Carlo Bellavite Pellegrini is a professor of banking and finance at Milan Catholic University's Department of Economic Policy. His research interests include banking and finance, corporate governance, ESG and sustainability, legal and financial issues, microfinance, corporate finance, and the corporate history of banks and industrial companies. Laura Pellegrini is an associate professor, researcher, and lecturer in banking and finance at the University of Bari Aldo Moro in Italy. Her research focuses on banking and finance, corporate governance, corporate finance, systemic risks, sustainability, legal and financial issues, political connections and corruption, as well as stability and efficiency issues in financial intermediaries. Massimo Catizone is a member of the Scientific Committee of the Center for Applied Economics Research at Milan Catholic University, as well as an investment banker at a leading pan-European investment bank. Is ESG the survival pass for companies? Let's see what the experts have to say! Definition of the concept of ESG ESG stands for Environmental, Social, and Governance. It is a comprehensive system of indicators measuring corporate sustainability and social responsibility. Specifically: - The environmental dimension focuses on a company's performance in reducing pollution, addressing climate change, and protecting biodiversity, involving topics such as energy use, carbon emissions, and waste management. - The social dimension focuses on a company's performance in promoting employee welfare, safeguarding human rights, maintaining product safety, and giving back to the community, involving topics such as diversity among employees, supply chain management, and charitable donations. - The governance dimension focuses on a company's performance in enhancing transparency, protecting investor rights, and improving board systems, involving topics such as ownership structure, incentive mechanisms, and anti-corruption efforts. ESG goes beyond the limitations of purely financial indicators and evaluates the quality of companies from a more comprehensive perspective, making it an important basis for investors seeking long-term value. Importance of ESG in the current business environment In today's world, issues such as climate change, social conflicts, and ethical crises are becoming increasingly prominent, making it difficult for traditional profit-oriented business models to continue. Integrating ESG principles into decision-making has become a necessary path for corporate transformation: - In terms of the environment, global warming, resource depletion, and frequent disasters are pushing companies towards a path of green and low-carbon development. - In terms of society, demands for employee rights, consumer awakening, NGO oversight, and requests for companies to take on more social responsibility are increasing. - In terms of governance, shareholder activism, institutional investors, and technological empowerment are driving companies to improve transparency and efficiency in their operations. On one hand, stakeholders such as governments, investors, and consumers continue to raise their demands for ESG performance, making ESG a "pass" for survival for companies. On the other hand, numerous studies show that ESG-leading companies can gain competitive advantages, lower capital costs, and create excess returns, making ESG an "engine" for creating company value. Purpose and framework of the book The purpose of this book is to systematically summarize the important theories and cutting-edge practices in the ESG field, analyze the connotations of the various dimensions of ESG, and empirically test the impact of ESG on corporate financial performance and market performance using a large sample, providing decision support for ESG investment and corporate management. The book is divided into seven chapters: the first chapter introduces the research background, purpose, and framework; the second chapter discusses the theoretical foundation of ESG; the third chapter analyzes the three core dimensions of ESG; the fourth chapter empirically tests the relationship between ESG and corporate performance; the fifth chapter focuses on the rules and practices of ESG disclosure; the sixth chapter looks ahead to the development trends and challenges of ESG; the seventh chapter summarizes the entire book and provides future prospects. One of the highlights of this book is its combination of theoretical analysis and empirical research, integrating issues such as the environment, society, governance, on the basis of Western research to the practices in emerging markets, aiming to present a panorama of the ESG field for readers. Whether you are a corporate executive looking to incorporate ESG into decision-making or an investor looking to consider ESG, this book can provide you with ideas and references. ESG: The Way to Future Development for Companies! Understand the underlying logic behind it The emergence and development of ESG are not arbitrary, but rooted in theories such as corporate social responsibility, stakeholders, and sustainable development, from which the logical framework of ESG and long-term value creation for companies extends. Theory of Corporate Social Responsibility The theory of Corporate Social Responsibility (CSR) holds that companies are responsible not only to shareholders but also to a wider range of stakeholders. As early as the 1950s, Bowen outlined the rudiments of modern CSR theory. Since then, scholars have enriched CSR's connotation from perspectives such as economic responsibility, legal responsibility, and moral responsibility. CSR theory laid the foundation for companies to focus on environmental and social performance. However, CSR focuses on the ethical dimension and lacks operability. ESG, building on CSR, proposes a set of measurable, comparable, and improvable metrics.The indicators are used to measure the ESG practices, making it an effective tool for implementing the CSR concept.The Stakeholder Theory The Stakeholder Theory, proposed by Freeman et al., advocates for businesses to balance the interests of shareholders, employees, consumers, suppliers, communities, and other stakeholders. Unlike shareholder primacy, this theory emphasizes the importance of stakeholders for the long-term survival of a business. The Stakeholder Theory provides an analytical framework and theoretical basis for ESG. Environment, social, and governance factors represent the three major categories of stakeholders for a business: external ecological environment, internal human resources, and owners and management. Only by considering the interests of these three parties can a business prosper. The Theory of Sustainable Development The Theory of Sustainable Development emerged in the 1980s, with its core principle being to meet the needs of present generations without compromising the ability of future generations to meet their needs. Sustainable development emphasizes the integration of economic, social, and environmental factors and has become a global consensus. Sustainable development establishes the ultimate goal for ESG. Whether it is protecting the environment, caring for society, or improving governance, all efforts are aimed at achieving the sustainable development of human society. ESG is essentially an important means to implement the concept of sustainable development. ESG and Long-Term Value Creation for Companies Why should companies embrace the ESG concept? The core reason is that ESG contributes to long-term value creation for companies. Specific mechanisms include: Environmental friendliness helps companies reduce energy consumption, improve efficiency, and gain a competitive edge in the GREEN ECONOMY era. Caring for employees helps companies attract and retain talent, stimulate innovation, and build a good brand. Improved governance helps companies enhance decision-making quality, avoid moral risks such as insider trading, and earn investor trust. In short, in an era where stakeholders are increasingly aware, only by upholding the concept of sustainable development and taking on social responsibility can companies achieve long-term stability and success. ESG is the "navigator" that guides companies towards long-term value creation. The above theories together form the logical starting point and analytical framework of ESG. In the following chapters, this book will further analyze the essence, performance, and challenges of ESG from a practical perspective, providing readers with a comprehensive view of this cutting-edge field. The Real Face of Corporate Social Responsibility: In-Depth Analysis of the "Social" Dimension in ESG Environmental (E) Factors The environment is the primary dimension of ESG. With climate change intensifying and natural resources becoming increasingly scarce, environmental management has become a trend for businesses. The environmental performance of a company mainly involves addressing climate change, enhancing environmental risk management, and promoting green innovation. (1) Impact of Climate Change on Companies Climate change is one of the most severe challenges facing the world today. Global warming leads to extreme weather events, rising sea levels, and brings real physical risks to business operations. In addition, measures taken by countries to mitigate climate change, such as carbon pricing and emission restrictions, pose transition risks to high-energy industries. The way to address this is to take proactive action. Forward-looking companies are striving to reduce their carbon footprint by using renewable energy, improving energy efficiency, and developing low-carbon products. This not only enhances the resilience of the company but also enables it to seize the vast opportunities of a low-carbon economy. (2) Environmental Risk Management for Companies Apart from climate change, environmental pollution, ecological destruction, resource depletion, etc., are also significant environmental risks that companies face. Once an environmental crisis erupts, companies will suffer dual blows to their reputation and finances. To control risks, an increasing number of companies are establishing environmental management systems, implementing comprehensive monitoring and control of waste emissions, water resource utilization, etc. At the same time, financial institutions are incorporating environmental risks into their investment decisions. Initiatives such as the Equator Principles and the Principles for Responsible Investment have prompted the financial industry to strengthen environmental due diligence of their clients. Projects with high pollution and high risk are becoming increasingly difficult to receive financing support. (3) Green Innovation and Circular Economy Amid tightening environmental constraints, green innovation has become a key strategy for companies to break through. Through technological innovation and new business models, companies are constantly coming up with clean energy solutions such as solar power, wind power, hydrogen energy, as well as sustainable consumption models like the sharing economy and product-serviceization. The circular economy has paved another important path for companies. Following the "reduce, reuse, recycle" principles, companies are accelerating the construction of a circular value chain of "resources-products-renewable resources." Emerging formats such as industrial symbiosis and reverse logistics not only promote cost-effectiveness for companies but also contribute to the ultimate goal of zero waste and zero emissions. Embracing green and low-carbon development has become an inevitable path for the survival and development of companies. Only by upholding environmental bottom lines, actively embracing green innovation, can companies seize the initiative and stand out in the new round of competition. This applies to both developed economies and emerging markets. ESG provides an important lever for assessing the environmental performance of companies. Social (S) Factors Social is the second key dimension of ESG. As "citizens" of society, companies need to be responsible to various stakeholders, including employees, consumers, suppliers, communities, etc. The performance of companies in areas such as employee relations, human rights, and product responsibility constitutes the core elements of the social dimension. (1) Employee Relationship Management Employees are a company's most valuable asset. Safeguarding employee rights, creating a diverse and inclusive corporate culture, are essential responsibilities of modern businesses. In terms of employee relationship management, leading companies share common features such as: Prioritizing occupational health and safety and placing safety production first. Establishing a fair promotion channel by perfecting the compensation and benefits system. Providing training and development opportunities for employees to unleash their potential. Respecting employees' freedom of association and establishing effective communication mechanisms. Talent is crucial for driving innovation and productivity improvement. From an ESG perspective, companies that truly view employees as "partners" and put "people first" will stand undefeated in the competition for talent. (2) Human Rights and Supply Chain Management As companies' influence continues to grow, their human rights responsibilities are increasingly scrutinized. In a global context, multinational companies, in particular, face issues such as child labor, forced labor, etc.Human rights risks. In response to these challenges, more and more companies are developing human rights policies, conducting due diligence on suppliers to ensure the entire supply chain complies with human rights standards. Human rights has become a key ESG issue of concern for investors. The rise of initiatives such as the UN Principles for Responsible Investment and the Human Rights Corporate Benchmark is driving more and more investment institutions to incorporate human rights into investment decisions. Saying no to companies that violate human rights has become an important criterion for responsible investment.Product liability and community relations Products are the link between companies and consumers. Providing safe and high-quality products is not only a legal obligation for companies, but also a key to gaining consumer trust and winning the market. More and more companies have established a full life cycle management system for products, rigorously controlling quality from design, production to after-sales service. Companies are rooted in communities, and community relations are crucial for their development. Leading companies actively fulfill their community responsibilities, improve the community environment, promote local employment, and give back to society through volunteer services, charitable donations, etc. During the COVID-19 pandemic, many companies extended a helping hand, demonstrating community awareness and a sense of responsibility. Valuing and practicing social responsibility is an inevitable requirement for modern companies. With the awakening of stakeholder awareness, corporate social performance has become an indispensable part of ESG and is essential for sustainable development. Emerging market companies, in particular, need to strengthen supply chain management and enhance product quality to build a more responsible and inclusive business ecosystem. Corporate Governance (G) Factors Corporate governance is the third pillar of ESG. As the cornerstone of modern companies, a good governance structure is the key to ensuring efficient operation and sustainable development of companies. Corporate governance mainly involves shareholder protection, board construction, and executive compensation as core areas. (1) Shareholder Protection Shareholders are the owners of companies, and safeguarding the legitimate rights and interests of shareholders, especially small and medium shareholders, is the primary task of corporate governance. Currently, many companies engage in behaviors that harm the interests of small and medium shareholders, such as controlling shareholders misappropriating assets and insider trading. To address this, companies should establish the following systems: - Cumulative voting system to ensure the nomination rights of small and medium shareholders - Related party transaction avoidance system to prevent controlling shareholders from transferring benefits - Investor relations management system to ensure fairness in information disclosure - Cash dividends distribution to allow shareholders to share in the company's growth dividends Companies should treat shareholders as equal "patrons" rather than "sheep to be slaughtered". Only by gaining the trust of investors can companies attract long-term capital and achieve sustainable development. (2) Independence and Diversity of the Board of Directors The board of directors is the core of corporate governance, and its independence and effectiveness are crucial. Practice has shown that institutional investors favor companies with sound governance structures, especially focusing on the independence of the board of directors. Therefore, the introduction of independent directors has become an important measure for many companies to improve governance. Independent directors help represent the interests of small and medium shareholders, balance the interests of controlling shareholders and management, and provide an external perspective for board decisions. In addition, diversity in terms of gender, age, professional background, etc., among board members, helps improve decision-making quality and mitigate "groupthink". Boards should evaluate their own performance regularly to continuously improve operational efficiency. (3) Executive Compensation and Incentives In the "principal-agent" relationship, the goals of shareholders and management may be inconsistent. Designing a reasonable executive compensation plan helps reduce agency costs and align the interests of shareholders and management. Specifically: - Emphasizing both base salary and performance bonuses, combining short-term incentives with long-term incentives - Incorporating ESG metrics, integrating sustainable development goals into executive assessments - Deferring payments, clawback clauses, etc., to avoid short-term behavior - Regular evaluations and adjustments based on market conditions Executive compensation is increasingly becoming a focus of attention for institutional investors and regulatory agencies. Through reasonable design, executive compensation can serve as an "accelerator" for promoting long-term value creation for companies. Improving corporate governance has become an indispensable part of ESG. In an increasingly mature capital market, only through openness, transparency, and balanced order can companies win the hearts of investors, drive capital forces, and achieve long-term success. For emerging market companies, it is urgent to learn from mature market experiences, strengthen benchmarking and learning. (Translated by KidzStar, ESG Recommended Official)