What is ESG? Environmental, social and governance criteria

ESG is a framework for assessing a company’s non-financial performance under three headings: Environmental, Social and Governance. The term came out of the investment world, when investors realised a company’s long-term risk could not be assessed from its balance sheet alone.

What the three letters measure

• E — greenhouse gas emissions, energy and water use, waste management, biodiversity, pollution, resource efficiency
• S — occupational health and safety, labour rights, diversity, human rights in the supply chain, community impact, product safety
• G — board structure and independence, anti-corruption, tax transparency, remuneration policy, data security

The three dimensions are not equally measurable. Most of the E dimension is quantitative and verifiable: tonnes CO₂e, m³ of water, tonnes of waste. The S and G dimensions are mostly assessed on the existence of policies, process maturity and incident counts. That asymmetry largely explains why ESG ratings differ between agencies.

Who is asking

ESG data no longer comes only from investors. Banks use ESG criteria in loan pricing, large buyers in supplier selection, public bodies in tender evaluation. In sustainability-linked loans the interest rate can be tied directly to ESG targets — turning ESG performance into a financing cost line.

Is ESG the same as sustainability reporting?

Close, but not the same. ESG is an assessment framework and usually carries the perspective of an outside actor — an investor, a rating agency, a bank. Sustainability reporting is the company’s own disclosure activity, done under standards such as GRI, CSRD/ESRS or ISSB. The report is an input to the ESG assessment.

Where the E data comes from

This is the most scrutinised part of an ESG score, and in most companies the answer is weak. Scope 1 and 2 emissions can be calculated from invoices and meters. But most of the total sits in Scope 3 — the supply chain and product use — and until that is measured the score rests on estimates.

Product-level LCA enters here: product footprints collected from suppliers feed Scope 3 Category 1, and the use and end-of-life impact of your own products feed Categories 11 and 12. The weakest link in an ESG report is strengthened by product data.