Explainer
ESG stands for environmental, social and governance. It is the set of measures used to judge how a business manages its impact on the planet and on people, and how well it is run. Here is what each part covers, what ESG means in business, how it is reported in the UK and where to start.
By Christopher Fagan, Managing Partner, PEF Consulting Partners
ESG stands for environmental, social and governance. The term came from the investment world, where investors wanted a consistent way to compare companies on risks and impacts that do not show up in the accounts straight away. It is now used far more widely: by lenders, customers, regulators, employees and public sector buyers.
How the business affects the environment, and how environmental change affects the business: greenhouse gas emissions across scopes 1, 2 and 3, energy use, waste, water, pollution, biodiversity and the physical and transition risks of climate change.
How the business treats people: its workforce, its supply chain, its customers and the communities it works in. That covers health and safety, pay and conditions, diversity and inclusion, human rights in the supply chain, data protection and customer outcomes.
How the business is run and controlled: board oversight, risk management, internal controls, executive pay, anti bribery and corruption, tax transparency and, increasingly, the quality of the data behind every ESG claim.
For a business, ESG is two questions asked together. What risks and opportunities do environmental and social issues create for us, and what impact do we have on the world around us? Answering the first protects value. Answering the second is increasingly what regulators, customers and buyers expect to see evidenced.
In practice ESG shows up as reporting obligations, questions in tenders and supplier questionnaires, conditions in lending and investment, and expectations from staff. It is less about a separate sustainability team and more about whether the core business can show how it is run.
Sustainability is the broad goal of operating in a way that can continue without harming the environment or society. Corporate social responsibility, or CSR, is the older idea of a business doing good alongside making money, often through voluntary programmes. ESG is narrower and more measurable: specific, reportable data and controls that an investor, lender or regulator can test.
Which of these apply depends on size, listing and where you trade. Our guide to ESG frameworks sets out how they fit together.
ESG matters because the questions are now asked by the people who control money and contracts. Lenders price it, investors screen on it, large customers push it down their supply chains and public sector buyers score it in tenders through social value. Weak ESG data is also a risk in its own right: claims that cannot be evidenced invite challenge from regulators, auditors and the press.
Start with a materiality assessment to establish which issues actually matter to your business, then get the data and controls behind them right before you publish anything. Most ESG problems we see are data problems: numbers held in spreadsheets nobody owns, which cannot be traced back to a source.
A way of measuring how a business manages its environmental impact, how it treats people and how well it is governed, using data that others can compare and test.
Environmental, social and governance. In business it covers the risks and impacts in each of those areas and how the company evidences them in reporting, tenders and investor discussions.
Not as a single law, but parts of it are. Large companies must report energy and carbon under SECR, many must make climate related disclosures, and listed companies face further rules. UK SRS sets the standard for sustainability disclosures, and the government and the FCA decide which companies must use it.
Sustainability is the overall goal. ESG is the measurable framework used to report on it and to be judged against it.
Businesses facing a first mandatory report, a large customer or lender asking for ESG data, or a tender with social value and carbon questions. An ESG consultant helps decide what is material, builds the data and controls, and produces disclosures that stand up. See our ESG consultancy.
The way a business identifies, manages and reports its environmental, social and governance risks and impacts, so that investors, lenders, customers and regulators can judge how it is run.
ESG is defined as the environmental, social and governance factors used to assess a business beyond its financial results.
Related reading: ESG reporting explained, ESG frameworks explained, CSRD vs UK SRS, what a double materiality assessment involves.
If ESG questions are landing on your desk from investors, customers or tenders, we can help you work out what matters and get the data right. Our ESG work is led by Christopher Fagan, who holds an ESG qualification from the University of Oxford.