What is ESG?
The world is facing environmental challenges, social inequality and pressure for corporate accountability ¨C and people are paying attention to how businesses operate beyond the bottom line. In this article, we¡¯ll explain what ESG means, how it is measured and why it¡¯s becoming important for businesses.
What does ESG stand for?
ESG stands for environmental, social and governance. It¡¯s a framework used to understand how well a business is managing its responsibilities to nature, people and stakeholders.
The environmental component covers how the business interacts with the natural world, including initiatives to reduce pollution, adopt sustainable practices and address climate change. Businesses that manage their environmental impact are better positioned to adapt to ecological risks and meet growing expectations from customers, regulators and investors.
The social component looks at how a company treats people. Issues like workplace diversity, human rights and employee well-being all fall under this pillar. These approaches help businesses build trust, boost morale and create a more engaged workforce.
The governance component refers to how the company is led and managed. It covers board structure, ethical decision-making, transparency and how a company complies with relevant laws and regulations. Good governance supports smarter decisions, lowers risk and builds credibility with stakeholders.
Overall, these three areas offer a more human-centred, data-driven view of what good, ethical business looks like.
What are the three pillars of ESG?
The three pillars of ESG are environmental, social and governance practices.
Environmental
Looks at a company¡¯s ecological footprint and sustainability efforts. It covers how resources are used, what emissions are produced and how the business prepares for environmental risks. For example, companies may measure their energy usage, invest in renewable technologies or set carbon reduction targets. Ultimately, it¡¯s about using resources efficiently, which helps businesses by reducing costs and future-proofing operations.
Social
Focuses on how a business affects people. That includes the employees and the wider community. A business with strong social practices may implement fair hiring practices, support employee wellbeing, give back to local communities or take a stand on social issues.
Companies that do well here tend to attract more loyal staff, enjoy higher employee engagement and build stronger reputations, making them more resilient in a competitive market.
Governance
Centred around good leadership, accountability and ethical business management. It¡¯s how decisions are made at the top and whether those decisions are made in a responsible and transparent way. This includes having an independent board and maintaining strong financial and organisational controls to prevent fraud and mismanagement.
Even the most profitable business can be brought down by poor governance. Weak oversight, such as ignoring risks or allowing bad behaviour, quickly erodes trust. Trust can be hard to win back.
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What does ESG measure?
While ESG is about doing the right thing, it also should be based on real data. Businesses are often asked to show how they perform across each of the three ESG areas.
Companies usually track quantitative and qualitative data, including numbers, practices and policies. For the environmental pillar, companies might track their carbon emissions, water use and waste management practices. In the social space, common metrics include diversity statistics, employee turnover rates and the number of workplace incidents. Governance can be measured through board composition, audit practices and how closely a company adheres to legal and ethical standards.
Capturing and reporting ESG data can be tricky. One major challenge is that there is no single global standard for ESG reporting; different industries and countries use different frameworks. It¡¯s also hard for smaller businesses that don¡¯t have big teams or budgets to collect all the data.
To make it easier, many organisations use well-known frameworks like the Global Reporting Initiative (GRI), United Nations Sustainable Development Goals (SDGs) and the Sustainability Accounting Standards Board (SASB). These tools help businesses determine what to report and how to track their progress.
Other best practices include setting clear goals, collecting the same types of data over time and being honest about accomplishments and challenges. It also helps to talk with stakeholders, like employees, investors and customers, to understand what issues matter most to them.
Even though it can take time and effort, regular ESG reporting helps companies track how they¡¯re doing, stay transparent and earn trust from the people who matter.
Why is ESG important??
There are many reasons why ESG is becoming more important for business success. A strong ESG strategy helps businesses prepare for and respond to challenges that aren¡¯t just financial. Whether dealing with extreme weather or staying out of legal trouble, it¡¯s a powerful tool for managing risk.
ESG also builds trust and strengthens reputation. Consumers and investors want to support brands that reflect their values. Companies known for being ethical, sustainable and socially responsible are more likely to earn loyal customers and attract funding to support growth.
Strong ESG performance is also good for the bottom line. These businesses often run more efficiently, attract great employees and are better equipped to handle change or disruption.
Governments and regulators are also stepping in. New rules around climate reporting, ethical sourcing and supply chain transparency are becoming more common. It¡¯s vital to stay ahead of these requirements.
ESG matters when it comes to attracting and keeping talent. People want to work for companies that care about social and environmental issues.
Are ESG and CSR the same??
ESG and CSR are often mentioned together, but are not the same. Corporate social responsibility (CSR) typically refers to a company¡¯s voluntary initiatives, such as charitable donations, volunteer programs or community sponsorships. It¡¯s about giving back to the community.
ESG, on the other hand, is broader and more structured. It¡¯s about integrating environmental, social and governance practices into the core of how a company operates, showing measurable results.
CSR might involve fundraising for a local charity, while ESG might be embedding diversity and inclusion practices into hiring processes, tracking emissions and holding the board accountable to sustainability goals.
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