Environmental, Social and Governance (ESG)

What is ESG?

ESG stands for Environmental, Social and Governance, which are considered the three main pillars of ESG frameworks. These pillars cover key areas that companies must address and report on. The purpose of ESG is to identify and consider non-financial risks and opportunities associated with a company's day-to-day operations.

Why ESG?

Our world is facing major global challenges, including climate change, the transition from a linear to a circular economy, rising inequality and the need to balance economic priorities with societal wellbeing. In response, investors, regulators, consumers and employees are increasingly demanding that companies manage financial capital, natural and social resources responsibly. They also expect these efforts to be supported by a sound governance framework.

What falls under the three pillars?

Under the environmental pillar fall emissions such as greenhouse gases and emissions from air, water and soil pollution. Resource use, e.g. whether a company uses virgin or recycled materials in its production processes and how a company ensures that the maximum amount of material in its product is returned to the economic cycle from cradle to grave instead of ending up in a landfill. Examples of EU customs-related regulations: CBAM, EUDR.

As part of the social pillar, companies disclose how they manage the development of their employees and their labour practices. They also address product liability, focussing on the safety and quality of their products. In addition, companies report on labour standards, health and safety measures within their supply chain and issues related to controversial sourcing. Forced labour regulations fall under this pillar.

The reports within the Governance Pillar include shareholders' rights, diversity on the board, executive compensation, and the alignment of that compensation with the company's sustainability performance. Additionally, it encompasses issues related to corporate conduct, such as anti-competitive practices and corruption.

How do you report?

Today, ESG is widely regarded as a reporting framework, but it was initially created to assess the sustainability-related disclosures of publicly listed companies for investors. As the demand for ESG-related information has increased, the ESG framework has become closely associated with reporting. However, there can be significant variations at the data point level. Consequently, companies depend on sustainability reporting standards to guide their reporting practices and determine what information to disclose. Learn more about EU standards here.