In this guide
Here’s the introductory ESG (environmental, social, governance) guide you’ve been looking for. We’re keeping things simple in hopes that by the time you’ve finished reading this, you’ll better understand the basics of the ever-changing ESG landscape.
ESG meaning & definition
ESG refers to the environmental, social, and governance factors that investors measure when analyzing a company's sustainability efforts from a holistic view. Many companies publish ESG reports in alignment with ESG reporting frameworks, standards, regulations, or investor expectations to demonstrate transparency and disclose the environmental, social, and governance factors that contribute to the overall risks and opportunities involved with a company’s operations. The data types included can vary from greenhouse gas emissions to labor practices, workforce diversity, executive compensation, and more. Confused yet? Don’t worry, we’re going to break all of this down for you.
Environmental
The “E” in ESG means the environmental responsibility companies have, including energy use and how they manage their environmental impacts as stewards of the planet. Some examples of environmental issues are:
- Carbon emissions
- Energy consumption
- Climate change effects
- Pollution
- Waste disposal
- Renewable energy
- Resource depletion
Social
The data disclosed in the social responsibility portion of ESG covers a wide range of topics from how companies are fostering people and culture to diversity statistics and community impact. Some examples of social topics are:
- Discrimination
- Diversity
- Human rights
- Community relations
Governance
Governance in ESG covers how companies are directed and controlled—and how leaders are held accountable. Increased transparency into corporate governance is quickly becoming an expectation. Some example topics related to governance include:
- Open configuration options
- Executive compensation
- Shareholder rights
- Takeover defense
- Staggered boards
- Independent directors
- Board elections
- Political contributions
Your ESG strategy checklist
Once you have determined the internal and external stakeholders whom you serve, it's time to tap into your company network and build a team of self-motivated individuals who are eager to support your ESG program. Build a diverse, cross-functional team of ESG stakeholders with expertise in different areas, like finance, human resources, internal audit, investor relations, legal, and risk.
Download ESG reports to compare and determine what data peers are disclosing and which ESG frameworks they're using. Based on this research, engage your ESG stakeholders to brainstorm which metrics are important to your organization, identify what ESG data you're already collecting, and determine the data you still need.
User information gathered from stakeholders to perform an ESG materiality assessment and refine the metrics and values that matter to your organization. Then map the journey to achieving your goals for ESG reporting and ESG performance overall.
Enhance your ESG reporting and carbon management efforts with the right technology. The Workiva platform simplifies the collection, management, and reporting of ESG data by offering robust data integration and advanced analytics. With Workiva's carbon management software, you can gain real-time insights into your carbon emissions, comply with regulatory requirements, and build stakeholder confidence in your sustainability initiatives. These tools help you meet your ESG goals and show your commitment to environmental responsibility.
What is ESG reporting?
ESG reporting involves disclosing information about a company’s operations and risks in three areas: environmental stewardship, social responsibility, and corporate governance. Investors can use ESG reports to identify which companies to invest in with less financial risk because of their environmental impact, social standards, or governance structure. ESG reports help guide investors in ESG investing, which involves avoiding companies that may be impacted by more strict ESG metrics in the future or other risks related to ESG data included in their reports. ESG investing helps companies adjust their corporate ESG strategies to focus on providing more information and transparency in their ESG disclosures.
ESG scores
What is an ESG score?
What is an ESG score?
ESG scores, which can vary widely in format, rate a company's risk and performance across environmental, social, and governance metrics. These scores can be numeric or alphabetic, and different providers use different scales. For example, some ESG scores range from 0 to 100, where a higher score often indicates better performance, but in some cases, it can indicate higher risk. Another common scale is 1-10, with 1 representing the lowest risk. Alphabetic scales such as A-F are also used, where A is typically the best. Specific scoring systems include MSCI's AAA rating for top performers, Sustainalytics' lower numeric scores indicating lower risk, and Bloomberg's varied datasets and ratings. Understanding the specific scale and methodology used by each provider is essential for accurate comparative analysis.
ESG scoring criteria
ESG scoring criteria
ESG scores are complex because score providers, ratings agencies, and rankers use different criteria to evaluate companies. Some gather information through surveys or questionnaires directed at companies, others review public disclosures, and some use a combination of both methods. Additionally, certain providers don't have publicly available scoring criteria, making it challenging to understand their evaluation methods. This variability underscores the importance of knowing the specific criteria and methodologies used by each ESG score provider.
Who controls ESG scores?
Who controls ESG scores?
ESG scores are controlled by independent rating agencies like MSCI, Sustainalytics, and Bloomberg. These agencies use data from company disclosures, regulatory filings, media reports, and third-party sources to evaluate a company's environmental, social, and governance performance. Companies can influence their scores by improving sustainability practices and increasing transparency.
What metrics are used to determine ESG scores?
What metrics are used to determine ESG scores?
Most ESG rating agencies and rankers determine companies’ ESG scores through proprietary evaluation processes that provide limited transparency. ESG metrics aligned to frameworks and standards generally inform these scores, but raters and rankers also may include media trends, controversy analysis, and other public information. ESG metrics serve as a baseline for ESG reporting consistency and provide guidance for companies starting their ESG journey.
The function of ESG scores
The function of ESG scores
ESG scores provide a baseline for evaluating a company’s ESG risk, but without broad and standardized reporting frameworks (and regulations to enforce accurate and complete reporting), ESG scores are only as accurate as the data that companies have chosen to disclose—or what can be found online. Often, companies decline to disclose certain information, which can result in a failing score. Investors use ESG scores to help evaluate where to direct their money in the absence of standardized disclosures.
ESG FAQs
Global and industry ESG reporting standards are rapidly changing — and the regulations, frameworks, and standards don’t all align on the information they request from a company, whether it’s about the supply chain, ESG goals, or performance. This has led many companies to disclose only what they’re required to, or to use ESG frameworks that make the most sense for their stakeholders.
ESG rating agencies and rankers use different criteria and methods to determine ESG scores. Many companies haven’t been collecting ESG data or do not have structures or a team in place to put a complete ESG report together. Working across departments to compile, analyze, and report financial and non-financial data for ESG disclosures isn't always easy — this is where ESG frameworks and ESG software and platforms come into play.
ESG data includes more than just each company’s individual impact. It also includes partners, community impact, and companies in their supply chain.The types of ESG data that a business can disclose can be vast.
- Examples of environmental ESG data canrange from greenhouse gas emissions to water and raw material usage or even waste management.
- Examples of social ESG data can include statistics on company diversity, human rights, animal rights, and even information related to labor practices in the company's supply chain.
- Examples of governance ESG data often includecompany values, employee relations, and corruption concerns as well as employee and executive compensation.Investors are looking for this data to provide transparency into company leadership and operations.
Many companies use ESG reporting frameworks to generate consistent reports that address the standardized ESG metrics for their industry. The purpose of ESG metrics is to create consistent, comparable reporting and drive companies to reduce their impact on the environment, improve their social influence, and provide more clarity on their internal governance.
Due to the many benefits of ESG reporting, investors and providers of capital are increasingly using these reports as a factor in their decision-making process. ESG reports provide transparency for investors and allow them to make more informed business decisions. They also help businesses analyze and evaluate their impact on our world and make strides toward setting and achieving their ESG goals — all while realizing business value in the process.
ESG reports do more than encourage companies to disclose their impact on our world — they help hold companies accountable for their impact. Although ESG reports may not be mandatory for all companies, the corporate landscape is moving toward an expectation for companies to be transparent on their ESG impact.
ESG vs. sustainability
Sustainability and ESG often seem interchangeable, but this isn’t the case. The meaning of sustainability can be broad but is generally focused on protecting the planet and people. ESG is focused on the material issues—emissions, water use, diversity, equity, and inclusion—that pose imminent financial risks to a company because of its industry, business practices and operations.
ESG requirements
ESG requirements
ESG reporting requirements can vary by jurisdiction and industry, and they are still evolving. What ESG information is most relevant for any company to report is based on their operations, management, and stakeholders’ expectations.
Among ESG reporting software providers, Workiva has embedded top frameworks into its platform so companies can map their ESG data to frameworks and standards as they create their annual ESG reports.
ESG regulations
ESG regulations
For years, companies haven’t had many rules to follow for ESG reporting, though the U.S. Securities and Exchange Commission has for years told publicly traded companies to disclose financially material climate-related matters. As regulators around the world finalize ESG reporting requirements, a growing number of organizations have been aligning with ESG reporting frameworks and standards including the Global Reporting Initiative Standards, Sustainability Accounting Standards Board Standards, and recommendations of the Task Force on Climate-Related Financial Disclosures—or the GRI Standards, SASB Standards, and TCFD recommendations.
ESG frameworks and standards
ESG frameworks and standards
A number of ESG frameworks and standards exist to help create comparable disclosure. They also help companies determine how to report and how to measure. A single company can use multiple frameworks or customize their reports to share their most relevant ESG data. It is recommended to look at which ESG frameworks similar companies within your industry are using, in addition to engaging stakeholders on their disclosure needs and start from there.
ESG investing
ESG investing
ESG investing is when investors prioritize and consider environmental, social and governance performance and metrics in their investment decision-making process. The pressure for companies to be more transparent and forthcoming on their ESG reports comes from modern investors and the push from the broader investment community.
Here are some results from a ESG Attitudes Survey Workiva commissioned in 2021:
- More than half (61%) of adults want to know their moral beliefs align with a company before investing
- More than half (64%) agree that ordinary investors should put pressures on companies to be more transparent
- A majority (68%) shared they want data they can trust
Dive deeper into ESG
We’ve barely scratched the surface of ESG and ESG reporting, but we hope you’ve learned something new in this guide. If you’re looking for more ESG goodness, check out some of our additional resources below.
