ESG, which stands for Environmental, Social and Governance (ESG), is a framework used to evaluate an organisation's business practices and performance on sustainability and ethical issues. These are called pillars in ESG frameworks and represent the three main topic areas that companies are expected to report in. The goal of ESG is to capture all the non-financial risks and opportunities inherent to a company's day-to-day activities. It also serves as a tool for assessing business risks and opportunities in these areas.

• Environmental criteria refer to company operation’s environmental impact and stewardship.
• Social aspects refer to how the company manages relationship with and creates value for stakeholders.
• Governance refers to a company’s leadership and management philosophy, practices, policies, internal controls, and shareholder rights.

Why is ESG important?

Consumers’ behaviour have changed to focus more sustainable practices. People increasingly look to recycle, minimise waste and make greener product choices and to reward businesses that act responsibly. In ESG investing, these goals also influence decisions on investment choices.

Often, both individual and institutional investors who consider ESG issues want to use their money to support companies that align with their own values on environmental sustainability and social responsibility. In addition, such companies could have better long-term financial performance than other organisations because of lower costs, reduced business risks and new marketing opportunities, potentially leading them to outperform in the stock market. ESG investing has seen strong growth as a result.


ESG helps identify immediate and long-term risks:

• Physical risks: Assets affected by the result of extreme weather
• Transition risks: Risks related to transition to low carbon, circular economy
• Existential risks: Risks of becoming stranded assets (fossil fuel, coal energy)
• Regulatory risks: Risks associated with evolving regulations
• Reputational risks: Risks in shifting consumers’ sentiment

The process involves several steps to provide relevant ESG data to investors. Companies track internal ESG metrics, which can differ from organisation to organisation based on the industry, business makeup and corporate priorities. They can then use various ESG reporting frameworks to document and publish the results. Next, different ESG rating agencies analyse the reports and award ESG scores to the companies.