What is ESG? Understanding the 3 Pillars and how to measure its performance

ESG (Environment, Social, Governance) is a structuring framework that enables the evaluation of organizations' sustainable and ethical performance. Based on three interdependent pillars - Environment, Social, Governance - it guides investors' decisions and influences the strategy of organizations that aim to have a positive impact on society and the environment.

Greenscope helps you understand everything about ESG pillars and criteria, and the methodologies to measure them.

ESG is an international acronym commonly used in the financial community, denoting the Environmental, Social, and Governance criteria used to evaluate an organization's performance in terms of sustainability and ethical impact.

The goal of ESG is to encourage sustainable and responsible practices in businesses and organizations. These criteria are used by investors and institutions: the evaluation of a company's performance on ESG criteria is thus used to determine its environmental and societal impact and enrich the analysis of its future financial performance. A company's performance on ESG criteria significantly influences investment decisions and its valuation.

Consequently, ESG criteria are increasingly used by companies themselves, in a proactive approach. To align with a sustainability and responsible investment approach, it is now essential to link a company's financial performance to its environmental and social impact.

All sectors are concerned with ESG: finance, of course, but also the energy, retail, tech, health, and industrial sectors.

Finally, ESG evaluation involves many stakeholders: it engages companies and their employees, investors and financial institutions, regulators, and civil society actors (consumers, NGOs, etc.).

ESG relies on 3 pillars - Environmental, Social, Governance - which are the dimensions on which a company can have a positive or negative impact, directly or indirectly.

• The criteria of the Environmental pillar measure: the company's direct or indirect greenhouse gas emissions, its electricity consumption, waste production, impacts and dependencies on biodiversity, etc.
• The criteria of the Social pillar measure the impact of the company's activities on stakeholders throughout its value chain (employees, customers, suppliers, local communities): the rate of workplace accidents, staff training rate, quality of social dialogue, etc.
• The criteria of the Governance pillar measure the proper management and administration of the company: remuneration levels and ratios (between the highest and lowest wages, for example), relations with suppliers, independence of the board of directors, shareholders' rights, representation of minorities within the company, etc.

An ESG assessment must therefore be conducted on these three pillars, in order to provide a clear and transparent view of the company's overall performance in terms of sustainability and ethics. The company's financial performance can then be analyzed in light of its performance on ESG criteria. The results can then motivate investment decisions or encourage the company to adjust its strategy.

Standards, frameworks, and ratings based on ESG

ESG criteria have become a global benchmark for measuring companies' non-financial performance. They thus form the backbone of numerous standards, frameworks, and ratings used by companies to measure and communicate their commitment to sustainability and ethics. Many regulations, such as the CSRD, also rely on ESG to structure the mandatory reporting of organizations, both in the European Union and worldwide.

Frameworks like the Global Reporting Initiative (GRI), and standards like those from the International Sustainability Standards Board (ISSB) and the Sustainability Accounting Standards Board (SASB) rely on ESG criteria. They are used by numerous organizations.

ESG ratings and indices have also been developed by players like Ecovadis, Sustainalytics, Morgan Stanley Capital International (MSCI), and Dow Jones through the Dow Jones Sustainability Index (DJSI). By rating a company's performance on the three ESG pillars, these players obtain an overall score, which is generally used to guide investment decisions, but also the choice of a supplier. The advantage of ESG ratings is that they provide a standardized and, in principle, comparable score - provided that the rating method is identical.

Finally, regulatory frameworks rely on ESG criteria. The ESRS, at the heart of the CSRD, are built around the

Environmental

Social

and Governance

What is the role of ESG in investment?

According to Capital Insight (source), 25% of global investment assets are expected to be invested according to ESG criteria by 2025, and 80% of institutional investors report integrating ESG criteria into their investment decisions. ESG investment thus attracts a growing number of investors eager to make more sustainable, but also safer and more profitable investments.

ESG investment actors therefore take ESG criteria into account in their investment and divestment decisions. These investment decisions are driven by the idea that a responsible company will produce better long-term investment results, being more resilient than companies that do not anticipate social, climate, and transition risks. Many ESG investors thus support the idea that a company can be both profitable and sustainable, and that these investments are therefore more profitable than traditional investments. A 2024 study by Cushman & Wakefield (source) shows this: more than 60% of surveyed institutional investors report seeing a higher ROI on their ESG investments.

Moreover, investors may decide to exclude certain controversial sectors (fossil fuels, tobacco, etc.) from their portfolio. But their approach often goes further: investors can have a real influence on the evolution of practices within their holdings, strengthening their sustainable performance. By pushing companies to integrate social, environmental, and governance issues into their strategy and business model, they contribute to transforming the global economic paradigm.

ESG investors thus adhere to international initiatives such as the PRI (Principles for Responsible Investment) or national labels like the French ISR (Socially Responsible Investment) label, which distinguish ESG investors from traditional investors.

ESG reporting (Environmental, Social, and Governance) is the process by which companies communicate their performance and impact in terms of sustainability using ESG criteria.

This reporting is framed by the standards, benchmarks, or regulations previously presented. By providing a common framework for data disclosure to companies and financial actors, it helps investors and stakeholders assess risks and opportunities related to the E, S, and G dimensions. It becomes a strategic tool for attracting funding and enhancing the reputation of companies.

With the entry into force of national and supranational regulations, such as the CSRD or the SFDR in the European Union, ESG reporting has become essential for financial actors and companies.