ESG performance: Definition and best practices

ESG is an international acronym companies use to designate Environmental, Social, and Governance (ESG) criteria. These criteria constitute the three critical financial pillars for measuring the sustainability and ethical impact of a company's or a business's investments.

Essential in the corporate world, ESG is considered part of a business's socially responsible management to assess and predict future financial performance—notably in terms of risks and return on investment, in addition to the analysis of 'classic' financial metrics. Due to the growing importance of environmental and social concerns, ESG is increasingly at the heart of business considerations. For instance, today, 1 in 10 UK investors have taken part in ESG investing.

ESG criteria can assess how companies exercise their responsibility towards the environment and their stakeholders (employees, partners, subcontractors, and customers). Understanding and analysing these criteria is therefore vital to ensure sustainable growth and satisfy the expectations of investors and customers.

This article aims to clarify the meaning and scope of ESG criteria and offer companies actionable advice on improving their ESG reporting.

What is ESG?

ESG criteria are based on the three pillars that define a company's CSR approach: environment, social, and governance.

Here's what they cover:

Environmental: This ESG criterion considers how a company interacts with the environment regarding natural resource management, biodiversity, and environmental and climate impact. It includes elements such as water, raw materials, energy resource management, and the type of energy used. It also considers pollution (such as greenhouse gas emissions), waste management, respect for biodiversity, and the treatment of animals. Finally, this criterion measures the climate or environmental risks that may affect a company and evaluates how they can be prevented and mitigated.
Social: The social aspect encompasses everything that directly or indirectly impacts the well-being of employees, staff, communities, and suppliers with whom the company interacts. It primarily involves respecting human rights and complying with working standards and conditions (such as health, safety, working environment, hours worked, leave, pay, benefits, equal opportunities, diversity, and dignity). The company's commitment to and impact on its communities and initiatives to encourage and support employee training and development are also considered.
Governance: This aspect focuses on the company's leadership, emphasising transparency and ethics regarding compliance with current standards and regulations and the fight against corruption through internal audits and controls. It also considers manager remuneration based on the company's results, shareholders' rights, the structure of the board of directors and its independence, the separation of the roles of chairman and chief executive, and diversity. Engagement with shareholders, communication, and respect for their rights are also part of governance.

What is ESG performance?

Definition of ESG performance

ESG assessment evaluates how a company interacts with the environment, treats its employees and stakeholders, and adheres to ethical and transparent governance principles, considering all of the above. It measures how well the company manages the risks and opportunities associated with these factors.

Investors increasingly view companies with strong ESG performance as less risky, better positioned for the long term, and better prepared for uncertainty. Companies that embrace participatory capitalism may have a competitive advantage over those that stick to business as usual.

Key metrics and KPIs to measure an ESG performance

Here are the key indicators and concrete KPIs that can be measured to assess ESG performance:

Carbon footprint: The total quantity of greenhouse gas emissions expressed in CO₂ equivalents, including emissions from scopes 1 and 2 and relevant emissions from scope 3.
- Scope 1 represents direct emissions from sources directly controlled by the company (e.g. facilities, vehicles),
- Scope 2 includes indirect emissions linked to purchased energy consumption (e.g., electricity),
- Scope 3 includes indirect emissions from the company's activities generated by external sources (e.g. employee travel, supply chain, use of products sold).
Energy consumption: The company's total energy is categorised by renewable and non-renewable sources.
Staff turnover rate: The proportion of employees leaving the company over a given period, reflecting the stability of the workforce.
Diversity ratios: Representing various demographic groups within the company, particularly in management positions.
Board diversity: The composition of the Board in terms of gender, race, and independent directors.
Compliance with ethical standards: Adherence to ethical standards and applicable regulations, including anti-corruption measures and fair labour practices.

Key frameworks and providers of ESG performance assessments

The following standards provide a framework for analysing ESG performance.

The Global Reporting Initiative (GRI) establishes rigorous standards for sustainability reporting, which are widely adopted internationally.
The Sustainability Accounting Standards Board (SASB) focuses on providing material sustainability information for investors, facilitating the assessment of ESG impacts on companies' long-term financial performance.
The Task Force on Climate-related Financial Disclosures (TCFD) recommends transparent disclosure of financial risks and opportunities related to climate change, strengthening climate risk management and corporate resilience.

Additionally, many providers and platforms are helping to produce better ESG reporting by providing detailed assessments, data, and analysis.

MSCI, one of the world's leading providers of critical decision-support tools, provides ESG assessments and research to help companies and investors identify risks and opportunities.
Similarly, Bloomberg ESG Data Services offers similar services to inform companies' investment and strategic decisions.

How is ESG performance being measured?

Measuring ESG performance is essential to effectively managing a company's risks and opportunities. This crucial process relies on the rigorous collection of relevant data, in-depth analysis, and transparent reporting.

Internal audits and third-party assessments play a crucial role in ensuring the accuracy and reliability of the information collected. In addition, ongoing monitoring enables progress to be tracked and any necessary adjustments to be made to maintain sustainable and responsible performance.

Here is a short guide to help you make the most of your ESG reporting:

Identify relevant ESG factors and metrics: To develop an effective ESG strategy, start by identifying the environmental, social, and governance aspects that are most important to your business. Take into account stakeholder expectations and industry-specific standards to focus your efforts.
Collect data across the organisation: Gather accurate and varied data from all departments and business areas of your company. Use GRI, SASB, and TCFD frameworks to standardise data collection and guarantee reliability and relevance.
Analyse and compare data: Analyse your ESG data to identify positive trends and areas for improvement. Benchmark your performance against industry standards and best practices to set realistic targets.
Report: Prepare clear and accessible reports on your ESG performance using recognised frameworks. Include your essential indicators, successes and planned actions to improve your results. Make sure your reports are transparent to all your stakeholders.
Use insights to drive improvements: Use the insights from your analyses to implement concrete action plans. Engage your teams and stakeholders in the continuous improvement process by communicating openly about your progress and incorporating their feedback to reinforce your overall positive impact.

What are the benefits of ESG performance for business?

Analysing and improving ESG performance can have many advantages for a company in the short and long term. These can be categorised into tangible and intangible benefits.

Tangible benefits are measurable and quantifiable outcomes directly impacting a company’s financial statements or operational performance. These benefits can often be seen in cost savings, increased revenues, or improved efficiencies.

On the other hand, intangible benefits are non-physical advantages that are not directly measurable or quantifiable but significantly impact a company’s long-term success and reputation. These benefits often enhance the company’s value in ways not immediately reflected in financial statements.

Tangible benefits

Keeping an eye on ESG criteria and targeting better results enables better risk management. Companies with solid ESG performances are better equipped to identify and mitigate the risks associated with environmental and social issues, as shown by Whelan et al. (2021). This helps prevent regulatory fines and enhances operational stability. Additionally, it means better access to capital: with a good ESG rating, businesses can benefit from advantageous financing conditions and easier access to sustainable investment funds. Indeed, such performance boosts investor confidence because it means lower exposure to socio-environmental risks.

Furthermore, tangible benefits include cost savings through energy efficiency, waste reduction, and streamlined processes. Companies can also experience market share growth due to increased consumer demand for sustainable products.

Intangible benefits

Secondly, the company's reputation and brand image are strengthened, mainly through good ethics and a good relationship of trust with its stakeholders, customers, investors, and employees. A better reputation translates into increased brand loyalty, which can differentiate the company and help it perform better in a competitive market. Finally, strong ESG performance helps to attract and retain talents by aligning company values with those of employees, improving morale, reducing turnover, and attracting skilled professionals.

These intangible benefits, such as enhanced brand value, employee engagement, and stakeholder trust, contribute to the business's sustainability and long-term success.

To go further, Many researchers have analysed and measured the concrete impact ESG can have on a company in various scientific studies. For instance, Fatemi and Fooladi (2013) discuss how socially responsible businesses are more effective at meeting stakeholders’ needs and can unlock new opportunities for growth and enhanced risk diversification. Additionally, and more globally, El Ghoul et al. (2017) showed that, in a study based on a sample of 53 countries, ESG activities positively impacted business value, particularly in nations with less developed financial systems.

How can companies improve their ESG performance?

While it is important to understand the significance of ESG and to be able to measure its performance, companies also need to know how they can improve this performance.

Role of carbon accounting and decarbonisation

Carbon accounting is vital for tracking greenhouse gas emissions and understanding their origins. It provides the data needed to set and achieve emission reduction targets. When it comes to decarbonisation strategies, the emphasis is on actually reducing emissions rather than relying on offsets.

This includes a focus on energy efficiency, the uptake of renewable energy, and supplier engagement.

This is what to keep in mind:

Carry out a complete greenhouse gas (GHG) inventory, identifying all sources of emissions, including Scope 1, 2, and 3 categories.
Use consistent methodologies and tools such as the GHG Protocol and ISO 14064.
Establish scientifically based targets for emissions reductions, aligned with the latest climate data, to limit global warming to below 2°C (IPCC reports or Science Based Targets (SBTi) initiative).
Modernise the company's equipment and processes as much as possible to improve overall energy efficiency. This can be done by investing in technologies that reduce energy consumption and emissions.
Encourage the transition to renewable energy sources through direct investment or purchase contracts.
Use renewable energy certificates (RECs) to support the production of green energy.
Involve suppliers and customers in sustainability efforts by working with them to reduce emissions and adopt sustainable practices.

Diversity and inclusion

A study by Internationales Arbeitsamt (2019) showed that inclusion significantly boosts company influence. Organisations with inclusive cultures are 57.8% more likely to enhance their reputations. Consumers are also more inclined to purchase products from companies perceived as diverse and inclusive, and employees view inclusive workplaces as more ethical.

Similarly, Thorpe-Moscon et al. (2019) found that a significant percentage of Black, East Asian, and South Asian professionals experience high levels of vigilance against bias, which affects their well-being and retention rates. Their research highlights that creating an inclusive and diverse workplace is crucial for improving ESG performance, as it can reduce the emotional burden on employees, enhance their contributions, and ultimately support business stability and growth.

Therefore, improving diversity, inclusion, and governance practices will enhance our ESG scores through transparency. Here are some action points to achieve this:

Educate employees and leadership on the importance of these ESG pillars and implement concrete policies covering the various aspects of performance.
Invest in employee skills development by offering accessible training, encouraging continuous learning and professional growth, and educating about the needs of ESG.
Promote a culture of ethical behaviour and accountability at all organisational levels and establish reporting mechanisms to address inappropriate conduct directly.
Define and frequently update ESG objectives and periodically and regularly assess performance to make any necessary adjustments.
Engage in dialogue with employees and stakeholders to understand their expectations and concerns. Maintain open lines of communication and effectively incorporate their feedback.

Understanding and improving ESG performance is increasingly essential for sustainable growth and long-term business resilience. By adopting best practices in ESG measurement and improvement, companies can enhance their reputation, manage risks more effectively, and achieve better financial performance. Prioritising emissions reduction and integrating ESG principles into core strategies is crucial to meet the rising expectations of stakeholders and regulatory requirements.

Furthermore, businesses today must actively engage with their communities beyond mere financial gains. This inclusive approach supports business expansion and ensures lasting success and positive societal contributions. Embracing ESG practices now can pave the way for a more sustainable future, benefiting both companies and the communities they serve.

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