In recent years, the ESG objectives have become an essential reference point for companies that want to grow in a responsible way.
But what do the three ESG dimensions actually predict? How did they arrive at their current conception? And most importantly, how can companies adopt these criteria to respond to regulatory and market challenges?
In this article, we explore these aspects, offering a clear and practical overview of what ESG means and the role that these criteria are playing in the business landscape.
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What does ESG mean?
THEacronym ESG It is going to Environmental, Social and Governance, or Environmental, Social and Governance, which represent the three fundamental indicators used to evaluate sustainability in its entirety (usually in relation to companies and investments).
Often, in fact, when it comes to sustainability, attention is focused only on the component environmental, but, in reality, the concept is much broader. This is why it is essential to analyze in detail all 3 ESG dimensions and understand how they impact a business.
A company, for example, cannot be said to be truly sustainable if it sins in one of these 3 areas, however performing in the other 2.
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The three dimensions of ESG
E by Environmental
The "E" by ESG concerns a company's relationship with the environment and the way in which it manages its impact on it. This includes not only the reduction of emissions of CO₂ eq, but also the sustainable management of resources such as water, soil and the protection of biodiversity.
Companies that adopt a responsible approach invest in strategies of climate change mitigation, reduction of pollution and sustainable management of production chains.
Among the key aspects of the component Environmental so let's find:
- The reduction of greenhouse gas emissions and energy efficiency;
- the protection of biodiversity and natural resources;
- the adoption of sustainable practices in supply chain;
- the responsible management of waste and raw materials.
S by Social
The “S” by ESG focuses on social impact of a company: from working conditions, to gender equality, to inclusion initiatives and relationships with the community. A company with a strong ESG score in this category stands out for its respect for human rights, the enhancement of people and the fight against all forms of discrimination. In this case, it can be said that the company is performing from the point of view of social sustainability.
Among the main themes of the dimension Social So let's find:
- Respect for workers' rights and working conditions;
- inclusion and diversity in company policies;
- The attention to safety at work and the well-being of employees;
- The contrast to child labor and violations in supply chains;
- The contribution to community well-being through social initiatives.
G by Governance
The “G” by ESG It's about the way in which a company is managed and administered. Good performance in this area indicates that the company is operating in a ethical, transparent and responsible, ensuring meritocracy, fairness and compliance with regulations.
Among the main aspects of the size Governance we find:
- transparency in business strategies and in decision-making processes;
- The contrast to corruption, fraud and mispractices;
- meritocracy and respect for shareholder rights;
- the presence of clear and structured organizational models to ensure compliance with ESG regulations.
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How were the ESG criteria created?
From the Club of Rome to the definition of sustainable development
The path that led to Birth of ESG criteria starts Between the 60s and 70s, when a group of scientists, economists and entrepreneurs come together to create the Club of Rome. The mission of this organization is to analyze major global challenges, predict their evolution and propose alternative solutions to address them.
In 1972, the Club of Rome published the report 'The Limits of Development', a study that for the first time puts pen to paper, with scientific bases, the critical issues related to demographic growth, the consumption of natural resources and the impact of the industrial model. The underlying message highlights how infinite growth is not possible on a planet with finite resources.
Also in 1972, the first United Nations conference on the environment was held, from which the Stockholm Declaration. For the first time, a fundamental principle is enshrined: every human being has the right to decent living conditions in a healthy and sustainable environment.
It will be necessary to wait until the following decade for a further step forward through the publication of Brundtland Report which introduces the definition of sustainable development which still represents a point of reference today. The report states that “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to satisfy their own.”
With this passage, the concept of sustainability becomes more and more concrete, getting closer to ESG principles as we know them today. However, in those years, attention was still mainly focused on And by Environment, leaving in the background the social and governance aspects that would emerge with greater force in the following decades.
The 2030 Agenda and the SDGs
The evolution towards ESG criteria in the last decade it has passed through two key moments: the Agenda 2030 for Sustainable Development and Paris agreements, who have defined clear objectives to guide States, businesses and organizations towards a more sustainable development model.
In 2015, the UN adopted 17 Sustainable Development Goals (SDGs), a global action program that addresses environmental, economic and social challenges, from the fight against poverty to the energy transition. The SDGs embody the principles that we find today in ESG factors, providing a concrete basis for Measure the impact of companies.
Also in 2015, the Paris agreements mark the first binding agreement on climate, committing countries to contain the increase in global temperature well below 2°C, Aiming at 1.5°C. This objective has accelerated the integration of sustainability into business strategies, making the ESG assessment an essential tool for measuring the commitment of companies on these issues.
The 2030 Agenda and the Paris Agreements have therefore paved the way for ESG as we know them today, transforming them from a theoretical concept to a concrete criterion for guiding economic and financial choices.
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What are the new ESG regulations and how do they affect companies
In recent years, theregulatory attention on ESG has grown exponentially, pushing more and more companies to integrate these criteria into their strategies.
Directives such as CSRD (Corporate Sustainability Reporting Directive), the CSDDD (Corporate Sustainability Due Diligence Directive) and the regulation SFDR (Sustainable Finance Disclosure Regulation) are redefining the rules of corporate reporting and sustainability management.
The CSRD requires an increasing number of companies to publish detailed reports on their ESG performance.
The CSDDD, on the other hand, aims to empower companies throughout their value chain, requiring mandatory due diligence on human rights and the environment for prevent negative impacts in global supply chains.
Finally, the SFDR regulates the transparency in the financial sector, ensuring that investments declared sustainable comply with strict ESG indicators.
However, the adaptation to these regulations represents a challenge for many companies, who find themselves navigating in a complex regulatory environment and constantly evolving. The need to collect, validate and communicate ESG data in a structured way, it requires a cultural and operational change.
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How are companies moving to respond to new sustainability regulations?
To face sustainability challenges and comply with increasingly stringent regulations, companies must adopt a structured approach to managing ESG criteria. This means integrating sustainability in its business strategy, measure and report progress and rely on specialized figures to guide the process.
The first step is to define a ESG strategy clear and consistent with the business model. This means identifying priority areas of intervention, setting measurable objectives and implementing concrete actions to improve environmental, social and governance performance with a view to establishing a ESG path that creates long-term value, strengthening business resilience and increasing attractiveness to investors, partners and talents.
Reporting plays a central role in this process. The publication of the sustainability report has become a fundamental requirement, especially for companies subject to CSRD.
To support these activities, more and more companies are introducing the figure ofESG Manager, a professional responsible for collecting data, managing reporting obligations and integrating sustainability into business strategy. This role is crucial to ensure that the ESG approach is effective and in line with regulatory and market expectations.
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How are companies' ESG performance evaluated
To measure and improve their sustainability, companies must adopt ESG assessment tools that make it possible to analyze their environmental, social and governance impacts. These tools are essential not only to ensure regulatory compliance, but also to improve transparency to investors, customers, and stakeholders.
ESG assessment methodologies fall into three main categories. Let's see what they are.
- ESG standards: define precise guidelines for reporting, indicating which data to collect and how to structure the sustainability report. Among the main standards we find the GRI (Global Reporting Initiative) And the Sustainability Accounting Standards Board (SASB).
- ESG Framework: they guide companies in integrating ESG principles into business strategies. An example is the TCFD (Task Force on Climate-Related Financial Disclosures), which provides recommendations for communicating financial risks related to climate change.
- ESG Rating: they assess the level of sustainability of a company based on available information and are assigned by independent agencies. Among the main companies that assign ESG ratings are EcoVadis, CDP (Carbon Disclosure Project) and Sustainalytics.
Discover Up2You Insight's guide on how to improve your ESG ratings!
