What is ESG?
ESG stands for Environmental, Social, and Governance. It is an investing principle and a set of standards used to assess an organization’s business practices and metrics related to sustainable ventures involving environmental issues, social inclusion, and corporate governance. It is also known as responsible investing or impact investments and enables all the stakeholder to understand how an organization integrates ESG factors in their operations.
What Are The Three Pillars Of ESG?
Environmental: Maps a company’s engagement with environmental problems and how a business contributes towards safeguarding the environment. Thus, these factors include strategies to cut down carbon emissions, capture carbon, sustainable resource consumption, and initiatives to use natural resources judiciously.
Social: The social factor gauges a company’s social relationships such as those with employees, supply chain providers, partners stakeholders, consumers, and the communities they effect. It is an important criterion enabling large scale firms and the general public to assess a company’s impact on social world and the society in general.
Governance: Also known as corporate governance, this vertical analyzes a company’s management quality and the organization’s governance capabilities. Leadership incentives, stakeholder’s rights, transparency, social inclusion, labor, employee welfare, etc. are some of the factors that ESG analysts review to understand a company’s governing skills.
ESG factors are becoming increasingly important in the contemporary world where environmental challenges, social injustice, and corporate mismanagement results in acute loss of funds and resources. Thus ESG helps determine the sustainability of a company’s operation. It also establishes standards for long-term success, good quality management, and high financial returns, while reducing negative impact on environment, society, and management systems.
What Is The Difference Between ESG & CSR?
CSR stands for Corporate Social Responsibility. It is a self-regulated business model guiding a company towards social, sustainable, and environmental ventures that bring a positive impact to these factors. It is more of an ethical and regulatory principle, enabling a corporation to become socially aware and responsible for its power to impact major aspects of society. It prompts an organization to think beyond personal gain and launch projects focused on public welfare and sustainable development.
ESG is an investment criterion and metric used to analyze a company’s business models and management systems in environmental, social, and governance issues. It provides clear data and reports on how sustainably a company operates, based on well-defined metrics. ESG is primarily monitored by expert ESG analysts who review and scrutinize the data, providing clear assessments to all stakeholders.
| Definition | A measurable framework assessing environmental, social, and governance factors. | A voluntary business model focusing on ethical and social responsibility. |
| Purpose | To evaluate sustainability and ethical practices for investment decisions. | To enhance public image and contribute to societal welfare. |
| Focus | Data-driven and integrated into business operations. | Value-driven, often implemented as standalone initiatives. |
| Stakeholders | Targets investors, regulators, and analysts. | Targets employees, customers, and communities. |
| Impact | Sustainability, social equity, and governance. | Community engagement and ethical practices. |
| Example | Carbon reduction, governance transparency. | Charity, volunteering, and local development. |
The Origin & Evolution of ESG
1980
The modern-day ESG criteria have their roots in the 1980s when various organizations across the USA and other countries raised concerns about public health, the environment, and employee labor and safety standards. The goal was to use regulations and policies to reduce pollution and other harmful effects caused by the pursuit of economic growth and development.
1990
The decade marked the inception of the Corporate Sustainability Movement, where the government, general public, and management teams aimed to reduce a company’s harmful impact on the environment and social welfare. By this time, UNEP and IPCC reports had begun to reveal the consequences of human industry and corporations on the environment, resulting in human-induced climate change. Climate summits and conferences were also building pressure on nations to incorporate socially responsible metrics when evaluating a company’s overall performance.
2000
In 2004, the term ESG was first coined in a UN report called Who Cares Wins. Eventually, by 2010 and 2020, ESG evolved into a comprehensive set of frameworks and investing principles, allowing stakeholders to assess an organization’s performance based not only on financial returns but also on its impact on society and the world at large.
Why Is ESG Important?
ESG serves as an important framework for investors, stakeholders, management, employees, and even customers to analyze a company’s overall worth by including non-financial markers in evaluating performance and societal impact. It broadens the scope for profit and development by incorporating socially responsible and ethical factors into investment criteria. Thus, ESG creates necessary regulations and avenues for a company to progress without destroying the environment or causing economic inequalities.
It is also aligned with UNFCCC’s goal and COP ’21 Paris Agreement to achieve net-zero and is the right action toward the SDGs. A company with a holistic approach to production and development has the potential to challenge traditional norms of success by incorporating ESG factors into its pursuits.
Criticism of ESG
Since its inception, various thinkers and leaders have criticized ESG factors, stating that they hinder financial growth and negatively impact the macroeconomy; however, these claims are increasingly being challenged, and social responsibility is seen as an important criterion for a company’s equity and evaluation.
CSR and ESG are often used as advertising and marketing tools by companies to misrepresent and mislead stakeholders, highlighting environmental or social imperatives taken by the company, even when no practical actions have been taken. This phenomenon, particularly in the context of environmental and carbon reduction claims, is known as greenwashing and poses a significant challenge. Often, companies spend more on PR and marketing than on implementing actual social initiatives.
The quality of data used to analyze metrics, correct representation, evolving regulations, and politics also present challenges in accurately measuring ESG.
Examples of ESG criteria
| Pillar | Sub-criteria | Company Example | Initiative |
| Environmental | Carbon Emission Reduction | Tesla | Electric vehicles and renewable energy solutions |
| -do- | Resource Efficiency | Unilever | Sustainable packaging and sourcing |
| -do- | Biodiversity Conservation | Nestlé | Regenerative agriculture programs |
| Social | Employee Welfare | Inclusive workplace and wellness programs | |
| -do- | Community Engagement | Starbucks | Community Stores and job creation |
| -do- | Consumer Safety | Johnson & Johnson | Ethical product standards |
| Governance | Leadership Accountability | Microsoft | Executive pay linked to ESG goals |
| -do- | Stakeholder Rights | Apple | Supply chain transparency and labor rights |
| -do- | Anti-Corruption Practices | Siemens | Anti-corruption and compliance programs |
Conclusion
ESG has become an essential framework for driving sustainable development and ethical business practices in today’s world. By integrating environmental, social, and governance factors, companies can go beyond traditional financial metrics and demonstrate their commitment to long-term value creation, societal well-being, and environmental stewardship. While ESG faces challenges such as greenwashing and data representation, its importance in shaping responsible investments, fostering social equity, and mitigating environmental harm is undeniable. By embracing ESG principles, organizations can align themselves with global goals like the SDGs and net-zero targets, redefining success as a balance between profitability, sustainability, and accountability.
