ESG stands for Environmental, Social & Governance criteria, that are used to assess an organisation’s impact in the three aforementioned pylons. ESG measure the sustainability investments and the ethical impact of the organisation, going beyond its financial performance. Throughout the criteria, emphasis is placed on the organisation’s value chain, be it their employees, customers, investors, community stakeholders etc.
ESG assess the organisation’s environmental risks, impact and actions, encompassing the challenges related to the business operations and the ecosystem, biodiversity, energy efficiency, water management etc. An organization can address these risks through a robust environmental strategy and various initiatives (e.g. ways to reduce carbon emissions, optimize energy and water consumption etc.).
The S pillar in ESG refers to all policies and actions undertaken by an organization in order to manage its social impact and overall interaction with its stakeholders and various social groups. They include efforts to safeguard equality, human rights, health and safety etc. Compliance with labour law, fair wages, data protection, engagement methods and ethical treatment are only few examples of the S pillar that contribute to the organization’s sustainability pathway.
The G pillar encompasses the overall management structure and of an organization that establish and upkeep responsible and ethical business behavior. It includes, inter alia, board structure and composition that advance diversity and gender equality, public disclosures on executive’s wages, lobbying policies, whistleblower mechanisms etc.
The ESG criteria are used by investors, financial institutions and other stakeholders to evaluate the performance of the business. They also form an integral part of the organisation’s annual report, should the latter fall into the scope of CSRD, or can be pursued voluntarily. Disclosing ESG data contributes to the organisation’s business growth, brand outreach, better customer relations, talent acquisition etc.
In July 2023, the European Commission adopted the European Sustainability Reporting Standards (ESRS) for use by all businesses subject to the Corporate Sustainability Reporting Directive (CSRD), that will be adopted and implemented in four different phases/timeframes. CSRD is expected to replace the Non-Financial Reporting Directive (NFRD) that is in place since 2014, and expand the scope of reporting. The timeframe below indicates the four different stages: