What is ESG? Complete Guide to Environmental, Social & Governance

What is ESG?

ESG stands for Environmental, Social, and Governance — three key criteria used to evaluate a company's sustainability, ethical impact, and corporate practices. Together, these factors help investors, regulators, and stakeholders assess how well a business manages risks and opportunities related to sustainability.

Originally developed for socially responsible investing (SRI), ESG has evolved into a comprehensive framework that influences corporate strategy, risk management, and stakeholder relationships. Today, ESG performance directly impacts access to capital, customer loyalty, talent acquisition, and regulatory compliance.

ESG Definition

ESG is a framework for assessing corporate behavior and sustainability performance across three dimensions: Environmental (climate impact, resource use), Social (employee treatment, community relations), and Governance (board structure, ethics, transparency).

The Three Pillars of ESG

Environmental

The environmental pillar focuses on how a company impacts the natural environment and manages environmental risks. This includes carbon emissions, energy efficiency, waste management, water usage, and biodiversity protection.

Carbon Emissions

Greenhouse gas emissions across Scope 1, 2, and 3

Water Usage

Water consumption, efficiency, and wastewater management

Waste Management

Recycling rates, circular economy practices, and waste reduction

Pollution Prevention

Air, water, and soil pollution control measures

Biodiversity

Impact on ecosystems, habitats, and natural resources

Social

The social pillar examines how a company manages relationships with employees, suppliers, customers, and communities. It covers labor practices, diversity and inclusion, human rights, and community impact.

Employee Welfare

Working conditions, benefits, health & safety

Diversity & Inclusion

Gender diversity, equal opportunity, inclusive culture

Community Impact

Local community engagement and development programs

Human Rights

Supply chain labor practices and human rights due diligence

Customer Privacy

Data protection and responsible data handling

Governance

The governance pillar focuses on corporate leadership, executive pay, audits, internal controls, and shareholder rights. Good governance ensures accountability, transparency, and ethical decision-making.

Board Composition

Independence, diversity, and expertise of board members

Executive Compensation

Fair and transparent executive pay practices

Ethics & Compliance

Anti-corruption policies, code of conduct, whistleblower protection

Transparency

Financial reporting accuracy and disclosure quality

Risk Management

Identification and management of ESG-related risks

Why ESG Matters

Financial Performance

Companies with strong ESG practices often outperform their peers. Studies show that ESG leaders have lower cost of capital, better operational performance, and more stable stock prices.

Risk Management

ESG factors help identify potential risks before they materialize — from climate-related physical risks to reputational damage from social controversies.

Regulatory Compliance

ESG reporting is increasingly mandatory. BRSR in India, CSRD in EU, and SEC climate rules in the US require companies to disclose sustainability data.

Stakeholder Expectations

Investors, customers, and employees increasingly favor companies with strong ESG credentials. 85% of institutional investors consider ESG in their decisions.

Understanding ESG Scores

ESG scores are ratings assigned by specialized agencies to measure a company's ESG performance. These scores help investors compare companies and make informed decisions.

Major ESG Rating Agencies

MSCI ESG Ratings

Scale: AAA to CCC

Industry leader with 8,500+ companies rated

Sustainalytics

Scale: 0-100 Risk Score

Focuses on unmanaged ESG risk exposure

CDP

Scale: A to D-

Specializes in climate, water, and forests

S&P Global ESG

Scale: 0-100

Powers the Dow Jones Sustainability Index

ESG Reporting Frameworks

Multiple frameworks exist to guide ESG reporting. Understanding which ones apply to your organization is crucial for compliance and stakeholder communication.

BRSR

Business Responsibility & Sustainability Reporting

IndiaMandatory

GRI

Global Reporting Initiative

Global

TCFD

Task Force on Climate-related Financial Disclosures

Global

CDP

Carbon Disclosure Project

Global

SASB

Sustainability Accounting Standards Board

Global

CSRD/ESRS

Corporate Sustainability Reporting Directive

EUMandatory

Getting Started with ESG

Assess Your Current State

Conduct a materiality assessment to identify which ESG factors are most relevant to your business and stakeholders.

Collect Data

Gather data on emissions, energy use, water consumption, employee metrics, governance policies, and other relevant indicators.

Set Targets

Define measurable ESG goals aligned with science-based targets and stakeholder expectations.

Report Transparently

Publish ESG reports using recognized frameworks like GRI, BRSR, or TCFD. Be honest about challenges and progress.

Improve Continuously

Use insights from data and stakeholder feedback to continuously improve your ESG performance.

Ready to Start Your ESG Journey?

ESG PULSE makes it easy to track emissions, generate compliance reports, and improve your sustainability performance with AI-powered insights.

Frequently Asked Questions

What does ESG stand for?

ESG stands for Environmental, Social, and Governance. These are three central factors used to measure the sustainability and societal impact of an investment in a company or business.

Why is ESG important for businesses?

ESG is important because it helps businesses identify risks, attract investors, comply with regulations, improve reputation, reduce costs through efficiency, and attract top talent. Companies with strong ESG performance often outperform their peers financially.

How is ESG score calculated?

ESG scores are calculated by rating agencies (like MSCI, Sustainalytics, and CDP) based on hundreds of metrics across environmental, social, and governance categories. Factors include carbon emissions, labor practices, board diversity, and more. Each agency has its own methodology.

What is the difference between ESG and CSR?

ESG (Environmental, Social, Governance) is a framework for measuring and reporting sustainability performance with quantifiable metrics. CSR (Corporate Social Responsibility) is broader and focuses on philanthropic activities and ethical practices. ESG is more data-driven and investor-focused.

Is ESG reporting mandatory?

ESG reporting is mandatory in many jurisdictions. In India, BRSR reporting is mandatory for top 1000 listed companies. In the EU, CSRD makes sustainability reporting mandatory for large companies. Globally, many exchanges and regulators are moving toward mandatory disclosure.

What are Scope 1, 2, and 3 emissions?

Scope 1 emissions are direct emissions from owned or controlled sources. Scope 2 emissions are indirect emissions from purchased energy (electricity, steam, heating). Scope 3 emissions are all other indirect emissions in a company's value chain, including suppliers and customers.