Environmental, social, governance (ESG)

ESG is a practice in which investors consider a company’s environmental, social and corporate governance impact when making investment decisions. This makes ESG not only a priority for investors but also an imperative for corporations that want to both attract more shareholders and satisfy those they already have.

Here’s what corporations and their boards need to know, given that ESG investing is here to stay. We'll cover:

• What ESG is
• How the ESG movement took hold
• What a commitment to sustainability looks like in practice

What is ESG?

ESG meaning: “Environmental, social, and governance,” which, together, represent a more stakeholder-centric business approach. So, what is ESG? It is a framework used to assess the sustainability and ethical impact of a company's operations and practices. It is set on the principle that the environment is only one factor in determining an organization’s commitment to sustainability.

Companies that adhere to environmental, social and governance standards agree to conduct themselves ethically in those three areas. This commitment can draw on various strategies, tactics and ESG solutions. As ESG increasingly becomes the top of directors' minds, it’s essential to consider the global nuances that drive focus region by region.

ESG factors

To better understand the meaning of ESG, an excellent first step is to identify the factors within the environmental, social and governance categories.

Some common ESG factor examples include:

Environmental

Preservation of our natural world concerning factors like:

• Climate change
• Carbon emission reduction
• Water pollution and water scarcity
• Energy efficiency
• Air pollution
• Deforestation
• Greenhouse gas emissions
• Biodiversity

Social

Consideration of humans and our interdependencies:

• Customer success
• Data hygiene and security
• Gender and diversity inclusion
• Community relations
• Modern-day slavery
• Mental health
• Child labor

Governance

Logistics and defined processes for running a business or organization:

• Board of Directors and its makeup
• Executive compensation guidelines
• Political contributions and lobbying
• Tax strategy
• Risk management
• Venture partner compensation
• Board composition and refreshment best practices
• Anti-bribery strategy

What is the ESG movement?

ESG movement meaning: Considering the impact of business decisions on people and the planet alongside profits.

More specifically, the ESG movement reaches back to the 1960s, when investors began to prize social responsibility. Many investors of the time, for example, refused to invest in companies with ties to South African apartheid.

As deep as ESG’s roots run, the concept as we know it took hold in the mid-2000s and was codified in a 2004 report from the UN. Then and now, ESG is based on the idea that corporations have the power — and the responsibility — to effect change.

ESG is critical on many levels, including:

• For society: ESG investing may drive the search for solutions to the many challenges we face — from climate change to human rights violations to equity in the workplace.
• For investors: ESG performance has been shown to correlate strongly with financial performance; a 2024 report from S&P Dow Jones Indices found that the S&P 500 ESG Index outperformed the S&P 500 over one, three and five-year periods since its inception in 2019.
• For corporations: ESG is a business opportunity for open-minded corporations, as these issues shape consumer and employee expectations. Among millennials, 73%% of consumers are willing to spend more on brands that align with their values; meanwhile, 92% consider a sense of purpose important to their job satisfaction and well-being.
• For governments: Increased focus on ESG across the business and political spectrum has made this a vital issue for governments, exemplified by imperatives like the publication of the UN’s Emissions Gap Report 2024 that renewed the ESG focus.

What is the anti-ESG movement?

The anti-ESG movement represents a growing backlash against using ESG factors in business and investing. Critics argue that ESG considerations can politicize corporate decision-making or impose new ideologies on companies and investors. Many — even directors — also feel ESG’s benefits can be hard to prove.

For example, while the vast majority of board directors said diversity brought unique perspectives to the board and improved board culture, only 40% could tie it to enhanced company performance. In this vein, ESG opponents often point to several concerns:

• Fiduciary responsibility: Some argue that prioritizing ESG factors may conflict with an organization’s duty to maximize financial returns.
• Political polarization: ESG has become entangled in political debates, particularly in the U.S., where some state governments have enacted laws restricting ESG practices.
• Greenwashing: Skeptics claim that ESG lacks clear standards and can be used more as a marketing tool than a substantive strategy.
• Lack of transparency: Others criticize ESG metrics as inconsistent or subjective, making it difficult to assess real impact.

Understanding ESG risks

ESG risks are manifold and increasing: climate change, diversity, cybersecurity risk, reputational risk, and the list goes on.

“If you have a company where most of your customers are based in one particular part of the world and then that particular part of the world has a major incident, whether it's geopolitical or environmental or whatever it is, that's going to be a disruption to your business,” says Dottie Schindlinger, executive director of the Diligent Institute.

Meanwhile, pressure is intensifying from investors and other stakeholders to identify and mitigate ESG risks in a timely, effective fashion.

Boards, in their oversight role, need to be leaders in ESG and risk management, yet they often struggle to get their arms around this subject, even with clear risk scores, in large part because risks are spread across three different categories.

Environmental risks

Environmental risk includes mitigation and compliance efforts in areas like climate change, conservation and environmental protection. For example, what is a company's carbon footprint, and how does it ensure waste doesn't contaminate the soil, air and groundwater?

Today’s droughts, food insecurity and rising temperatures are having a domino effect on the environment, resulting in new regulations and new risk factors for investors. Over the long term, displacement from climate crises will change the demographic makeup of regions and nations, not to mention how consumers and employees live their lives.

Social risks

Social criteria encompass a company's business relationships with employees, suppliers, partners, shareholders, and the overall community. This could involve wage and labor issues, philanthropy, workplace safety, diversity, equity and inclusion.

“We're seeing literal spots on planet Earth also become geopolitical hotspots on planet Earth because things like the scarcity of resources, the scarcity of water, those things begin to exacerbate geopolitical tensions,” says Schindlinger. “Just kind of look at the map and figure out where we are and where might there be a choke point if that was knocked out, what would that do to our business?”

More specifically, PwC’s Annual Corporate Directors’ Survey found that the majority of directors surveyed are concerned about the impact of political divisiveness in the U.S., the lack of a cohesive U.S. immigration policy and the uncomfortable reality that their boards haven’t discussed these critical social issues.

Governance risks

Governance risks are those that could impact how a company is run, from board practices to transparency in shareholder communications to the ethics of its leadership. While risks have become increasingly interconnected, boards should focus on material ESG risks: the issues that most impact their specific company most in terms of cost, risk and growth.

Boards also should keep in mind that different aspects of ESG may be more relevant to their industry than others. For example, a mining company may pay more attention to environmental issues than an app development company would.

Tackling ESG risks head-on

A report by AICPA & CIMA and North Carolina State University’s Enterprise Risk Management (ERM) Initiative found that 66% of global executives feel the volume and complexity of risks are increasing.

These risks can be particularly daunting for small and medium-sized enterprises (SME) without a robust ESG program. However, organizations just starting their ESG journey can ground their approach in strong risk management using the power of AI. Integrating AI in risk management can analyze vast amounts of data to uncover hidden patterns and emerging risks, so SMEs can do more with ESG with fewer resources.

Accelerate your progress toward risk management mastery with Diligent AI Risk Essentials >

ESG myths

Though ESG is a priority for many, it’s also controversial. Many lawmakers believe ESG is a political calling card that detracts from generating real shareholder returns. This backlash, though, is largely tied to ESG myths that are easily misunderstood — but are even easier to debunk.

A few of these myths include:

1. ESG is a poor use of resources: For most companies, adopting ESG principles will require an up-front investment. That investment often pays for itself, though, given that it can also cut costs by reducing employee attrition, lowering the risk of penalties for noncompliance and stabilizing the supply chain.
2. ESG isn’t a good investment: There are lawmakers, investors and even corporations who claim that investing based on ESG isn’t profitable. However, intangible assets like reputation account for more than 90% of an organization’s S&P asset value, and Stock prices of companies with high ESG rankings also tend to be less volatile, whereas companies involved in high-severity ESG controversies experienced a 6-9% drop in share prices within ten days of the controversy and took at least 12 months to recover.
3. ESG is too difficult to track: Because ESG is multi-faceted, some feel that it can be difficult to truly track and manage. How can someone really know they’re making a sound ESG investment? While corporate ESG practices have evolved, they are currently quite strong. Many boards leverage ESG tools, and 90% of S&P companies have an ESG strategy, making ESG trackable and transparent.

The evolving ESG landscape

While there are ESG proponents and detractors aplenty, the reality is that ESG has evolved significantly since it first came to the fore. Why? Companies’ and regulators’ understanding of ESG has shifted, as have investor expectations and the very ESG landscape itself.

“This is a topic that’s here to stay,” says Sunni Chauhan, leadership advisory for board and CEO practice at Spencer Stuart. “The data that supports that is that 96% of directors expected a continued or stronger focus on ESG over the next five years. And there’s no surprise that DEI and climate change top the list. While the corporate world has been defined by flux, the reality is that very few companies are backing away from ESG ambitions.”

Over the years, ESG has adapted to:

1. Increased regulatory scrutiny: Organizations once established their own ESG targets based on their business and stakeholder expectations. Now, government and financial regulators are moving to standardize ESG disclosures so one organization’s performance can be more easily compared to another. From the SEC’s climate disclosure rules in the U.S. to the EU’s CSRD, organizations are under pressure to report with greater transparency and consistency.
2. Rising demand for materiality: Investors are shifting focus from broad ESG scores to material, sector-specific risks and opportunities. For example, 76.2% of the 3,000 largest U.S. companies cited climate change risk specifically in their 10-K reporting. Double materiality — how issues impact both business performance and society — is also gaining traction as a key facet of the EU’s CSRD. “There is certainly a lot of ramping up that companies are going to have to do to meet the new requirements and prepare for sustainability reports to face more scrutiny,” David Zilberberg, counsel with Davis Polk & Wardwell, told Diligent Market Intelligence.
3. Renewed focus on board composition: In recent years, stakeholders have paid closer attention to who sits at the boardroom table. Board diversity — across race, gender, expertise and lived experience — is increasingly viewed as essential for effective oversight of ESG risks and long-term strategy. This push includes younger directors with technological savvy; recent Diligent Market Intelligence Governance Data shows that the age profile for new appointees to S&P 500 and Russell 3000 boards is lowering, with 1 in 4 aged in their 50s.
4. Greater accountability on the ‘S’ and ‘G’: Environmental metrics have dominated the ESG conversation, but social equity, labor practices, board diversity and ethical governance are gaining steam. In just the first quarter of 2024, U.S.-based companies reported 181 social campaigns — more than double the campaigns launched in the same period of 2023. “Labor unions are playing a bigger part in driving companies to enhance workers’ rights and freedoms, both launching proxy contests and filing shareholder proposals,” DMI Senior Editorial Specialist Will Arnot wrote. While more obscure than their environmental counterparts, stakeholders expect measurable outcomes rather than promises or assurances.
5. Technology and data-driven transformation: New tools — AI-powered analytics, ESG-specific ratings and blockchain-based traceability — are reshaping how organizations and regulators track and verify ESG performance, offering both opportunities and challenges for companies.
6. Stakeholder capitalism is being tested: ESG was once aligned neatly with stakeholder capitalism, but now leaders must balance shareholder expectations with broader societal demands in a more fragmented and skeptical landscape. Some advocacy groups, like Amsterdam-based Follow This, have even paused resolutions to reassess. “Shareholder democracy is the only democracy in the free world where voting is considered an escalation. There has been a tradition of engagement in the ESG shareholder space. Slowly, we're getting them to understand that engagement without voting, without using the only tool they have, doesn't work,” says Follow This founder Mark van Baal.
7. Pushback and political polarization: ESG is both a business issue and, as of late, a political flashpoint. Some states and stakeholders are pushing back against ESG mandates, and broader conservative movements have challenged companies to clarify their approach and respond to criticism with nuance and data.

ESG investing

For investors, environmental, social and governance considerations are a growing priority. As our environment changes, new risk factors are cropping up for investors, and new regulations are being enacted to mitigate the effects of environmental damage.

All of this has resulted in what we now call ESG investing. Here we'll clarify:

1. The meaning and history of ESG investing
2. Impact investing vs. ESG investing
3. Whether ESG investing is good or bad
4. Why is it important
5. How ESG investing works
6. Types of ESG investing
7. The ESG investing rule

What is ESG investing?

ESG investing definition: Selecting investments based on the company’s policies and practices regarding environmental, social and governance issues.

Droughts, food insecurity, and rising temperatures have a domino effect on the environment that impacts multiple sectors. As a result, investors want to address those new risks and take action to prevent them. ESG investing is their solution.

ESG investing also signals a changing of the guard. Today’s generation of investors is on the receiving end of a massive wealth transfer from the Boomer generation, as much as $84.4 trillion by 2045, according to Cerulli Associates.

$50 trillion of that money could go into ESG assets in the next couple of decades, according to a Bloomberg estimate regarding ESG investing, accounting for more than a third of the projected $140.5 trillion in total global assets under management.

When did ESG investing start?

ESG investment started in the 1960s. While certain ethical concerns have changed, the principle of sustainable investing remains the same. More and more investors are adopting ESG criteria, evaluating their potential investments with an emphasis on how effectively corporations navigate people and planet, not just profit.

According to a report by PWC, the practice of ESG investing has grown over the last few years. The report states that the ESG asset pool will continue to grow rapidly and become essential in the investment process in the coming years.

The growth of ESG investing can be boiled down to three reasons, according to financial firm MSCI:

• The world as we know it is changing.
• The next generation of investors is changing the way investment works.
• Data and analytics have evolved to provide more information than ever.

What is the difference between ESG and impact investing?

Both ESG investing and impact investing are purpose-driven, but the difference has to do with the investors’ priorities. ESG investors consider the ethical implications of a corporation’s environmental, social and governance policies, while impact investors are more concerned with driving social change through their investment.

Is ESG investing good?

ESG investing is good for both the world around us and the investors’ return. People used to believe that ESG investments were a sacrifice — an investment more morally than economically motivated. Today, that isn’t necessarily true.

In fact, in 2018, global sustainable investing assets were approximately $29.86 trillion; by 2034, ESG investing is expected to reach $167.49 trillion.

Some studies have even suggested that companies with good ESG practices have lower capital costs and volatility. They also displayed lower instances of bribery, fraud, and corruption over time. These results suggest that, in the long run, ESG investments are more stable and can even outperform other companies.

Does ESG investing outperform traditional investing?

ESG investing can perform as well as — or even better than — traditional investing, particularly over the long term. Answering this question has been the subject of extensive research.

A 2021 meta-analysis by New York University’s Stern Center for Sustainable Business reviewed over 1,000 research papers from 2015 to 2020. The findings showed:

• 58% of corporate studies found a positive relationship between ESG and financial performance
• ESG strategies tended to provide better downside protection, particularly during market crises
• ESG integration was especially effective in active investment strategies rather than negative screening.

Why is ESG investing important?

ESG investing is important in many ways. 80% of the world’s largest companies have reported exposure to climate change-related risks, while climate-related events could cost those businesses $1.2 trillion annually by the 2050s. ESG is an important way to insulate against those risks.

ESG investing is also financially important. In a recent study, MSCI investigated the ties between ESG investments and the stock market, to see if there were any financially significant effects. The study used a three-channel model to look at how ESG data embedded in stocks gets transferred to the equity market.

The study found that, after examining idiosyncratic and systematic risk profiles for the companies involved in the study, ESG affected many of those companies’ valuations and performance. Companies with higher ESG ratings showed:

• Higher profitability: ESG companies with high ratings showed abnormal returns and were more competitive. This often led to higher profitability and dividend payments, especially when contrasted against low ESG companies.
• Lower tail risk: High ESG-rated companies experienced fewer idiosyncratic risk events like major drawdowns. Companies with low ESG ratings were more likely to experience these incidents.
• Lower systematic risk: High ESG companies had less volatile earnings and less systematic volatility. They also had lower betas and lower costs of capital than low ESG-rated companies.

ESG investing can also cut risk in emerging markets. There is research to suggest that companies adhering to ESG principles have a lower chance of tail risk — the risk of unlikely events that lead to catastrophic damage.

How ESG investing works

ESG investing works by giving equal weight to a company’s finances and its social impact. In ESG investing, an investor will evaluate how a corporation operates, how it relates to its community and how it impacts the environment to inform their investment decision.

If the corporation is found lacking in any of those areas, ESG investors are likely to move on.

How ESG factors are integrated into investments

ESG integration is the process of incorporating ESG risks and opportunities alongside financial metrics throughout the investment lifecycle. An investor may achieve this through either negative screening — the practice of excluding certain industries — or impact investing. In either case, the goal is to enhance the portfolio’s resilience and performance in the face of evolving environmental and social risks.

Here’s how an investor does it:

1. Investment research and due diligence: Assets and analysts evaluate how ESG factors affect the company’s long-term financial outlook. They may consider its carbon footprint, labor supply practices, board independence and more. This ESG data is combined with traditional analysis to develop a more holistic view of a company’s risk-return profile.
2. Portfolio construction and screening: Managers may assign ESG scores or ratings to securities, overweighting companies with strong ESG performance or momentum and underweighting or excluding those with material ESG risks.
3. Active ownership and stewardship: Investors, particularly institutional investors, can also influence ESG through proxy voting, shareholder resolutions and direct engagement. This includes urging companies to disclose climate-related risks, improve board diversity or set science-based targets.
4. Risk management and monitoring: Ongoing ESG monitoring helps identify new or evolving risks that could affect investment performance. For example, a supply chain labor violation or regulatory fine related to emissions could trigger a reassessment of a company’s valuation.

Types of ESG investments

Like traditional investing, ESG investors can invest in a variety of different products with the help of a robo-advisor or broker. These include:

1. Stocks: An investor can buy stocks in a company with satisfactory ESG performance. Before investing, the broker and investor should review documents like the financial report, shareholder report and ESG report to verify that the company’s approach to ESG aligns with their expectations.
2. Mutual funds and ETFs: These are investment portfolios comprised of multiple different securities, most commonly stocks and bonds. An investor can choose an ESG fund that’s already assembled a portfolio of ESG-focused companies. It’s important to research the specific fund, though, since each may have different investment priorities.

What is the ESG investing rule?

The ESG investing rule is a rule from the Department of Labor related to retirement funds. It allows companies that administer retirement plans covered by the Employee Retirement Income Security Act to consider ESG criteria in their investments.

This doesn’t change the fiduciary duty companies have to protect their investors’ assets, but it does expand the asset classes they can consider, signaling, once again, that the emphasis on ESG isn’t likely to go away.

Corporate ESG

Though ESG ties back to investing, investors have also swayed corporations to take ESG issues seriously. This has shaped not only the meaning of ESG for corporates and conversations in the boardroom but also activities throughout the entire corporate value chain.

Since the threats facing society will likely continue to loom, ESG will also remain a critical focus for investors in the coming decades. That makes corporate ESG an equally significant topic for corporations and their boards.

What does ESG mean in business?

In business, ESG equates to a business opportunity. Corporations can take a strong stance on ESG issues and signal to investors that they care about both generating reliable returns and mitigating their environmental and social impact.

Because not every corporation has adopted ESG equally, it’s also an opportunity for corporations to differentiate themselves. Those who take a systematic and strategic approach to ESG can carve out a reputation as ESG leaders in their industry — the kind of organizations young investors want to support.

How ESG differs from other acronyms

The boardroom is full of acronyms. While the ESG acronym can feel like another to add to the pile, it’s distinct from other acronyms that might circulate — all of which are important in their own way. Some of the acronyms to know are:

• ESG vs. SRI
  • SRI stands for socially responsible investing, and it’s more akin to impact investing than ESG investing. SRI investors are most concerned with the social impact of their investments, whereas ESG investors typically also consider company operations.
• ESG vs. GRC
  • Governance, risk and compliance (GRC) share governance with ESG. As a result, GRC can be considered an element of ESG — a business’s GRC practices would be related to its governance-related ESG targets.
• ESG vs. CSR
  • CSR, or corporate social responsibility, refers to a company’s approach to sustainability. Because it’s self-regulating, CSR can be a valuable companion to ESG, but ESG holds corporations to a higher standard.

ESG and the board

The relationship between ESG and the board of directors is still being defined. However, driving ESG buy-in from the top is essential.

“It’s been my experience that the very best results are achieved when every single person in the organization understands the why. And what I mean by that is, what are the motivations for setting the goal or goals in the first place? Both in terms of how they tie into the organization’s overarching purpose, the risks they’re trying to mitigate, and the opportunities that come with that,” says Lisa Bougie, an independent board director.

As it stands:

• Discussions around the “G” (i.e., governance) are often spearheaded by the nominating & governance committee with involvement from the full board, particularly when assessing how these risks integrate with the enterprise risk management (ERM) program or impact long-term strategy.
• More boards are incorporating the “S” (social considerations or corporate impact) into the strategy development process. According to PwC’s Annual Corporate Directors Survey, issues like political divisiveness, immigration policy and economic inequality have all surged in importance.
• When it comes to structuring oversight around the “E” (i.e., environmental issues), a recent global study by the Diligent Institute found that ESG oversight is likely here to stay — and may even expand. While 62% of ESG structures have remained stable, those that have changed assigned ESG a larger role in board and committee discussions, established a committee or subcommittee to increase oversight or formalized ESG oversight in the board’s governing documents.
• With ESG scores and rankings increasingly being published in the public domain, the importance of investing in ESG-focused organizations is growing. Published ESG metrics are attracting investor attention, increasing the importance of tools like ClarityAI — Diligent’s partner for generating science-based risk scores.

What are ESG examples?

Many corporations struggle to envision ESG in practice. But ESG strategies are more widespread than you might think. The following are some common boardroom topics that are also prime ESG examples:

Environmental examples:

• Minimizing your carbon footprint to fight climate change: This can include switching to energy-efficient operations, investing in low-emission technologies and setting net-zero targets.
• Reducing greenhouse gas emissions: Examples include optimizing logistics to reduce transportation emissions, retrofitting buildings to improve energy performance or redesigning products to require fewer resources.
• Using renewable energy throughout your value chain: Companies may commit to sourcing 100% renewable energy, require suppliers to do the same or invest in on-site solar and wind generation to power operations.

Social examples:

• Giving back to the communities in which you operate: This might include philanthropic grants, volunteer programs or community investment initiatives that address local needs such as education, housing or healthcare access.
• Creating an equitable and safe working environment: Examples include implementing anti-discrimination policies, offering paid family leave, prioritizing workplace safety and building inclusive career pathways for underrepresented groups.
• Treating your customers with dignity and respect: This could mean ensuring data privacy and protection, providing accessible customer service and designing inclusive products that meet the needs of diverse users.

Governance examples:

• Offering pay transparency and pay equity across your organization: Some companies conduct regular pay audits, publish compensation ratios or commit to eliminating pay gaps on gender, race or other factors.
• Assembling a diverse board of directors: Boards that reflect a variety of backgrounds and perspectives are better equipped to oversee risk and guide strategy. Many organizations set goals for racial, gender and skills-based diversity at the board level.
• Holding employees and leaders accountable for unethical practices: This includes implementing whistleblower protections, linking executive compensation to ESG metrics and taking swift, transparent action on misconduct policy violations.

Corporate ESG trends

According to the recent research from Diligent Institute and Spencer Stuart, corporations are currently at the following stages of implementing, documenting and disclosing ESG risks:

ESG metrics:

• 6% of organizations said they didn’t use ESG metrics in 2024, down from 10% in 2023
• 65% use ESG metrics to reduce their carbon footprint
• 45% use them to optimize the organization’s strategic plan or manage facilities and operations
• 31% consider ESG metrics for business growth and expansion plans
• 23% are retaining third-party assurance of ESG metrics

ESG disclosures:

• 62% are taking action to enhance ESG disclosures, reports and filings
• 27% are bringing in outside consultants or advisors
• 30% are implementing ESG training programs for individual directors

ESG risks:

• 20% are conducting scenario planning around ESG risks

ESG technology:

• 33% are installing monitoring solutions for ESG oversight

ESG frameworks and standards

As ESG reporting becomes more central to corporate strategy and investor decision-making, regulators and other governing bodies have attempted to implement standardized and comparable disclosures. Here’s a closer look at some of the most widely used:

• Global Reporting Initiative (GRI): GRI is one of the most commonly used frameworks for sustainability reporting worldwide. It provides standards that help organizations disclose their impacts on the economy, the environment and people in a way that is accessible to a wide range of stakeholders: civil society, regulators and customers.
• Sustainability Accounting Standards Board (SASB): SASB standards focus on the subset of sustainability issues, helping companies identify and disclose ESG issues that are financially material. In 2022, SASB merged under the Value Reporting Foundation, which was later consolidated into the International Sustainability Standards Board (ISSB) to align standards globally.
• Task Force on Climate-Related Financial Disclosures (TCFD): TCFD provides recommendations for disclosing climate-related risks and opportunities around four pillars: governance, strategy, risk management and metrics/targets. Like SASB, it is now being integrated into the new IFRS Sustainability Disclosure Standards (ISSB’s IFRS S1 and S2) as a part of a shift toward unified global reporting.
• International Sustainability Standards Board (ISSB): The ISSB was formed to streamline and consolidate ESG reporting globally. Its standards — IFRS S1 (general sustainability-related disclosures) and IFRS S2 (climate-related disclosures) — draw on existing frameworks like TCFD and SASB. ISSB represents a significant step toward comparability, especially for multinational organizations and capital markets.
• CDP (formerly Carbon Disclosure Project): This standard focuses specifically on environmental impact, taking a narrower view than other standards. It is widely used for disclosing climate data.
• UN Sustainable Development Goals (SDG): These are often used in a broader context, particularly in global development conversations. It aims to align broader business activities with sustainability goals.

ESG initiatives

ESG frameworks are about disclosure, but ESG initiatives are about action. Companies across industries have launched ESG initiatives to align business practices with environmental sustainability, social responsibility and strong governance — all under the umbrella of their corporate strategy and ESG framework of choice.

Environmental initiatives

Companies that prioritize the “E” in ESG often invest in climate and sustainability solutions that go further than regulators require. These efforts commonly include:

• Net zero commitments: Setting science-based emission reduction targets and timelines.
• Sustainable supply chains: Sourcing materials responsibly, reducing waste and working with suppliers to meet ESG standards.
• Circular economy models: Designing products and systems that reduce resource consumption and extend product lifecycles.
• Renewable energy adoption: Transitioning operations to wind, solar and other low-carbon energy sources.

Social initiatives

Companies may also take steps to further equity, inclusion and community accountability. Key initiatives include:

• Diversity, equity and inclusion (DEI) programs: Setting measurable goals for representation, pay equity and inclusive hiring.
• Employee well-being and labor practices: Offering mental health support, fair wages and safe working conditions.
• Community engagement and philanthropy: Supporting local economic development, education and public health.

Governance initiatives

Strong governance is the foundation of effective ESG performance, which is why companies are strengthening accountability and oversight through:

• Board composition: Adding directors with ESG expertise and expanding board-level responsibility for sustainability.
• Ethics and compliance programs: Updating codes of conduct, anti-corruption policies and whistleblower protections.
• Executive compensation tied to ESG: Linking bonus structures and incentives to progress on ESG goals.
• Transparent reporting practices: Publishing detailed, audited ESG reports aligned with frameworks like GRI, SASB or ISSB.

Building an ESG program with 10 steps and resources

The road to effective ESG initiatives isn’t always easy, largely because they're iterative. ESG success isn’t just adding a recycling program or offsetting your carbon emissions. It’s that, plus a systematic approach to making your operations sustainable — and your sustainability defensible. To do that, modern boards need to:

1. Identify ESG risks: Environmental, social and governance-related risks are on the rise. Companies need to assess what their unique risks are so they can build a program that mitigates them.
2. Implement ESG policies: Corporations should then document their stance on ESG issues, including specific expectations for their employees and vendors.
3. Integrate ESG across the value chain: Once you have policies in place, you should expect your entire value chain to follow them. It’s not enough to compost in your corporate office if your vendors are improperly disposing of waste.
4. Champion ESG diversity: Issues related to ESG are multi-faceted, so your leadership should be, too. Integrate diversity from the outset rather than addressing it as an afterthought. Reverse mentoring is another way to welcome diverse points of view.
5. Avoid rainbow washing: As you implement your ESG strategy, remember that it’s important to walk the walk, not just talk the talk. Pretending to be an ESG advocate without taking real action can do more harm than good.
6. Reduce your corporate footprint: Your corporate footprint refers to your impact on the environment. Take steps to reduce it, including through tools like carbon accounting.
7. Enforce ESG compliance: Your ESG program will only be successful if your employees take it seriously. Set a culture of compliance from the top, as well as clear expectations and training to help your employees understand what true buy-in looks like.
8. Create ESG reporting structures: Your reporting is a critical way to centralize your ESG data and prove to investors and regulators that you’re taking action. Consider incorporating GRI standards in your disclosures.
9. Utilize ESG automation: As your ESG program grows, it may be difficult to maintain manually. ESG automation can free up time and resources, automating repetitive tasks and leaving your team to focus on ESG strategy.
10. Leverage AI-powered ESG technology:AI solutions can automate the bulk of your ESG and risk reporting efforts, making it easier to hit your social and sustainability targets. Quickly analyze company filings, summarize and highlight risk factors and disclosures and generate year-over-year insights and assessments.

AI in ESG

ESG strategies have traditionally been reactive, responding to stakeholder and regulator expectations rather than a proactive view of the business landscape. Tools like Diligent AI are shifting this approach, analyzing massive data sets to identify material risks and opportunities and fundamentally changing how organizations approach ESG.

Here’s how:

1. Data collection and analysis at scale: ESGAI can gather, process and interpret vast quantities of structured and unstructured data in a fraction of the time. This includes everything from carbon emissions across supply chains to sentiment analysis from news and social media. AI tools can surface patterns and correlations that humans might miss, providing a real-time, evidence-based view of ESG performance and risk.
2. Materiality assessments and risk forecasting: ESG in AI models enhance materiality assessments by analyzing financial filings, regulatory disclosures, peer benchmarks and stakeholder input. They help organizations prioritize the ESG issues most likely to impact financial performance. Predictive algorithms can also forecast climate risk scenarios, flag potential compliance issues or anticipate supply chain disruptions — supporting more resilient business planning.
3. Benchmark disclosures: AI for ESG reporting can quickly analyze company filings such as 10-Ks and ESG reports to summarize, benchmark and highlight risk factors while providing year-over-year analysis, emerging trend identification and calling out shifting industry standards.
4. Automated ESG reporting and framework alignment: AI streamlines ESG reporting by mapping internal data to disclosure frameworks like GRI, SASB, TCFD or ISSB. It can even draft initial reports, flag inconsistencies, and ensure alignment with evolving standards.

FAQs

What is ESG, and why is it important?

ESG stands for environmental, social and governance. It's a framework used to evaluate how companies manage risks and opportunities related to environmental stewardship, social responsibility, and corporate governance. Investors and stakeholders use ESG criteria to assess a company's long-term sustainability and ethical impact, influencing investment decisions and corporate strategies.

What is ESG reporting, and why is it important?

ESG reporting involves the disclosure of data covering a company's operations in three areas: environmental, social and governance. This transparency allows stakeholders to understand a company's ESG practices and performance, aiding in informed decision-making. Effective ESG reporting can enhance a company's reputation, attract investors and ensure compliance with regulatory requirements.

Why is ESG so relevant to supply chain management?

Integrating ESG considerations into supply chain management helps companies mitigate risks, improve sustainability and meet stakeholder expectations. By assessing suppliers on ESG criteria, businesses can ensure ethical practices, reduce environmental impact and enhance overall supply chain resilience.

What is the difference between CSR and ESG?

Corporate social responsibility (CSR) refers to voluntary initiatives by companies to contribute positively to society and the environment. ESG, on the other hand, involves measurable criteria used by investors to assess a company's performance in environmental, social and governance areas. While CSR is often internally focused, ESG is data-driven and externally evaluated.

President Trump has signed a number of executive orders related to ESG issues.

In April 2025, President Trump issued an executive order titled "Protecting American Energy from State Overreach," aiming to remove state-imposed legal restrictions related to climate change and promote domestic energy production.

Part of the president’s broader push for deregulation, the order aims to reduce compliance costs and spur economic growth. While many directors see opportunity in the greater operational freedom, it also raises the importance of robust ESG mechanisms that hold up independent of regulatory mandates and reporting obligations.

What is one limitation of the ESG label?

One significant limitation of the ESG label is the lack of standardized scoring methodologies. Different rating agencies may assess ESG factors differently, leading to inconsistencies and potential confusion among investors. Additionally, ESG scores may focus more on internal processes rather than the actual impact of a company's products or services.

What is the difference between ESG and impact investing?

ESG investing involves evaluating companies based on environmental, social and governance criteria to mitigate risks and identify opportunities. Impact investing goes a step further by actively seeking investments that generate measurable positive social or environmental outcomes alongside financial returns.

What are the key debates on iShares ESG Aware MSCI EM ETF stock?

The iShares ESG Aware MSCI Emerging Markets ETF has sparked debates regarding its ESG criteria and the inclusion of certain companies. Critics argue that some holdings may not align with ESG principles, raising questions about the fund's screening processes and the broader challenges of ESG investing in emerging markets.

What does the acronym ESG stand for?

ESG stands for environmental, social and governance. These three pillars are used to evaluate a company's operations and performance on sustainability and ethical issues.

Current trends in ESG investing in the US market as of March 2025

As of March 2025, ESG investing in the US is experiencing shifts due to regulatory changes and political dynamics. Some states have implemented rules limiting ESG investments, while others continue to promote them. Investors are increasingly scrutinizing ESG disclosures, and there's a growing emphasis on standardized reporting frameworks to enhance transparency and comparability.

What is the difference between ESG and sustainable investing?

While ESG investing focuses on evaluating companies based on environmental, social, and governance criteria, sustainable investing encompasses a broader approach that includes ESG factors and considers long-term environmental and societal impacts. Sustainable investing aims to support companies that contribute positively to sustainability goals.

What does ESG stand for in corporate strategy?

In corporate strategy, ESG refers to integrating environmental, social, and governance considerations into business operations and decision-making processes. This integration helps companies manage risks, identify opportunities, and align with stakeholder expectations, ultimately contributing to long-term value creation.

Real-world examples of successful ESG investments

Several companies have demonstrated successful ESG investments. For instance, Microsoft has committed to becoming carbon-negative by 2030, and Accenture has implemented extensive diversity and inclusion programs. These initiatives have not only enhanced their reputations but also contributed to financial performance.

Microsoft has seen a reduced carbon footprint and increased energy efficiency, plus a reported $10 billion increase in sales due to ESG initiatives. Meanwhile, Accenture reported a 20% increase in employee engagement, a 17% increase in customer satisfaction and a 20% increase in shareholder value.

What does the 'G' in ESG stand for?

The 'G' in ESG stands for governance. It pertains to a company's leadership, executive pay, audits, internal controls and shareholder rights. Strong governance practices ensure accountability and transparency, which are crucial for long-term success.

What is the difference between 'green' and ESG?

'Green' typically refers to initiatives focused solely on environmental aspects, such as reducing carbon emissions or conserving resources. ESG encompasses a broader spectrum, including environmental, social and governance factors, providing a more comprehensive assessment of a company's overall impact and sustainability.

What are the three types of ESG investing?

The three primary types of ESG investing are:

1. Integration: Incorporating ESG factors into traditional financial analysis.
2. Screening: Excluding or including investments based on specific ESG criteria.
3. Impact Investing: Investing with the intention to generate positive, measurable social and environmental impact alongside financial returns.

How is ESG performance measured?

ESG performance is measured using various metrics and frameworks that assess a company's environmental impact, social responsibility and governance practices. These may include carbon footprint, labor practices, board diversity and compliance with regulations. Rating agencies and investors use this data to evaluate and compare companies' ESG performance.

What are ESG risks, and how do they impact businesses?

ESG risks refer to potential negative impacts on a company arising from environmental, social or governance issues. These risks can affect a company's reputation, legal standing and financial performance. For example, environmental disasters, labor disputes or governance scandals can lead to significant financial losses and damage to stakeholder trust.

How does AI support ESG strategy and reporting?

Artificial intelligence (AI) enhances ESG strategy and reporting by automating data collection, analysis and reporting processes. AI can identify patterns, predict risks and provide insights into ESG performance, enabling companies to make informed decisions and improve transparency.

What industries are most affected by ESG factors?

Industries such as energy, manufacturing and finance are significantly impacted by ESG factors due to their environmental footprints, social responsibilities and regulatory requirements. Companies in these sectors must proactively manage ESG risks and opportunities to maintain competitiveness and comply with stakeholder expectations.