If you’re an EHS professional, executive, or decision-maker, you’ve probably been hearing a lot about ESG. While you might have a general sense of what ESG is all about, it’s a little harder to know what’s involved in implementing ESG into your organization and how it differs from your existing sustainability efforts. There’s a lot of industry jargon thrown around, and ESG can look incredibly different from one organization to the next.
Here at Perillon, we want to provide you with the tools you need to efficiently meet new environmental, social, and governance (ESG) goals — as well as the resources you need on your journey. In this guide, we’ll answer some of the most commonly asked questions about ESG in plain English, in hopes of eliminating some of the confusion. Click the links below to jump to each question, or keep reading to see how ESG is defined today.
Table of Contents
- What is ESG?
- Why is ESG important?
- What are the 3 pillars of ESG?
- What are some examples of ESG issues?
- How is ESG different from sustainability?
- Who regulates ESG?
- What is ESG reporting, and how do you get started?
- ESG reporting tips
- Where is ESG headed in the future?
- What role does ESG software play in ESG performance?
(If you're looking for information about Perillon's solutions specifically, visit our ESG software page.)
What is ESG?
ESG stands for environmental, social, and governance. It refers to a set of non-financial factors used to measure a company’s impact on its employees, customers, and the community. This includes everything from air quality and waste management, to employee health and safety, to diversity and inclusion, to customer privacy and data security, to business ethics and competitive behavior.
ESG is not new, but it is the new normal. Today, more companies are talking about ESG in their boardrooms, during earning calls, and on their websites and social media channels. We’re also seeing more companies taking steps like linking executive pay to ESG performance — a sign that they are integrating ESG into their overall business strategy. And for good reason: ESG has become a primary concern among employees, customers, investors, and regulators.
Why is ESG important?
Focusing on ESG is important to meet the demands of investors and other stakeholders, who want to know that the companies they’re supporting are operating sustainably and managing their risks and opportunities. It can also help companies lower costs, meet compliance obligations, and deliver better financial outcomes.
Some of the main benefits of ESG include:
- Streamlined regulatory compliance
- Reduced operating costs
- Better shareholder returns
- Stronger customer loyalty
- Higher employee engagement
What are the 3 pillars of ESG?
The three pillars of ESG are environmental, social, and governance.
- The environmental dimension is what most of us automatically think of when we think of ESG. It is focused on improving the environmental performance of a company.
- The social dimension is focused on a business’ impact on its employees, customers, and the community.
- The governance dimension is focused on a business’ leadership and structure.
Now, let’s look at some examples of ESG issues for each of these dimensions.
What are some examples of ESG issues?
- Reducing GHG emissions
- Improving resource efficiency
- Emergency preparedness
- Managing climate related risks and opportunities
- Working conditions
- Health & safety
- Human rights
- Customer satisfaction
- Data and privacy
- Executive pay
- Board diversity, equity, and inclusion
- Preventing bribery and corruption
How is ESG different from sustainability?
ESG is often compared to sustainability, but they are not the same thing. ESG provides a specific set of criteria — namely, environmental, social, and governance — that companies can measure and report against. Sustainability, on the other hand, is more of an umbrella term for a company’s efforts to “do good”.
While there is a significant difference between sustainability and ESG, they are closely related. In fact, many of the key concepts of ESG are rooted in the sustainability movement, which began in the 1980s. Sustainability sought to preserve natural and physical resources in order to ensure their long-term availability.
In the decades that followed, many companies took steps to become more sustainable, like reducing their energy consumption and launching recycling programs. However, the word “sustainability” was so overused that it eventually became a cliché. With no clear criteria to measure sustainability, some companies resorted to greenwashing practices that made their businesses sound more sustainable than they really were. This, along with pressure from investors and regulators, led to the evolution of ESG as a way to measure the sustainability and societal impact of a company.
Who regulates ESG?
Government agencies are responsible for 90% of ESG regulations, according to research by MSCI. Financial regulators, central banks, industry and statutory bodies also play a role.
ESG regulations vary from country to country, and different countries have different practices when it comes to regulating ESG. In the European Union (EU), regulations like the green taxonomy and the Non-Financial Reporting Directive (NFRD) govern how companies address and report on ESG issues. In the US, on the other hand, there are currently no mandatory ESG disclosure regulations at the federal level. However, that could all change with the announcement of new SEC climate disclosure rules.
What is ESG reporting, and how do you get started?
ESG reporting is the process of collecting data about a company’s environmental, social, and governance performance and presenting the information in an organized format that is usually aligned with a reporting framework.
Some of the most common ESG reporting frameworks include:
These frameworks can help simplify reporting by outlining which issues your organization should disclose, what metrics to track, and even how to structure your sustainability reports. In addition, it can be helpful to look at ESG report examples from other companies to get a feel for what yours should look like.
While these frameworks and examples can help eliminate some of the confusion around reporting, companies still face many ESG reporting challenges as they consider integrating ESG into their organization.
ESG reporting tips
- Engage with stakeholders to determine which information is material to your company’s environmental, social, and governance reporting
- Build a multidisciplinary ESG team and foster collaboration between departments such as human resources, operations, product development, procurement, and marketing
- Gather operational data such as risk observations, near misses, and environmental measurements
- Engage frontline employees in your data collection efforts
- Align your reporting to global and regulatory frameworks
Where is ESG headed in the future?
While there is still a lot of uncertainty about what information companies should be reporting and how regulations will shape up in the future, it’s clear that ESG is here to stay. Statistics show that as of 2020, 88% of publicly traded companies, 79% of venture and private equity-backed companies, and 67% of privately-owned companies had ESG initiatives in place — and those numbers will only continue to grow as new ESG regulations emerge.
Today, companies are moving toward a more holistic approach to ESG. Holistic ESG is about looking at the whole business’ impacts on the world around it. In other words, businesses are moving beyond “going green” and addressing the full range of environmental, social, and corporate governance factors. This includes everything from carbon emissions and climate risk, to workplace safety and human rights, to board compensation and anti-bribery and corruption.
Unified ESG reporting standards
We are also seeing a movement toward more unified ESG reporting standards. For example, the International Financial Reporting Standards Foundation (IFRS) recently consolidated with the Value Reporting Foundation (VRF) and the Climate Disclosure Standards Board (CDSB) to form the first ever International Sustainability Standards Board (ISSB).
The goal of the ISSB is to create a set of global ESG disclosure standards. These standards would give businesses a standardized way to measure and report non-financial performance, and provide investors with consistent information to help them make informed decisions.
Asset-level ESG management
With the growing demand for ESG disclosure comes a need for more reliable and timely data. This explains why we are seeing a trend toward companies moving toward managing ESG at the asset level. Asset-level management refers to the practice of using software and sensors to capture data at the source.
For example, asset-level management could mean collecting information about energy usage for each piece of equipment. This yields more detailed information than looking at utility bills for the whole facility. Not only does this lead to more prompt and accurate reporting, it can also help you make more informed decisions about how to improve your company’s ESG performance.
What role does ESG software play in ESG performance?
ESG software refers to software that serves to centralize your ESG activities and data. Many companies can use ESG software to track, manage, and report on their ESG performance, such as:
Environmental data: ESG software allows you to measure energy usage, waste, water, and carbon emissions at the asset level. From there, you can set goals, analyze trends in performance, and make sustainable changes to your enterprise.
Health & safety: With ESG software, you can increase visibility and reduce health and safety risks across your organization. Everything from near miss reporting to incident investigations and corrective/preventive actions live under one roof.
Compliance: ESG software brings together your compliance actions, tasks, data, assessments, and reporting. This gives you a streamlined way to track your compliance responsibilities and ensure accountability.
More than ever, investors, customers, and employees want answers about how businesses are managing their impact on the world around them. This means that a strong ESG strategy, along with the software to support it, is more than just a "nice-to-have". To learn more about how Perillon can help your organization achieve its ESG goals, watch a quick overview or request a demo today.
Update: This page was originally published August 2022 and was updated January 6, 2023 for freshness and comprehensiveness.