What does ‘ESG’ mean?

Mar 4, 2024 | ESG

‘ESG’ stands for Environmental, Social and Governance.

ESG is an umbrella term for how an organisation interacts with the world around it. It considers what an organisation takes, and what it contributes, whether positively or negatively.

‘Environmental’ is fairly self-explanatory, it refers to things like water, energy use, carbon emissions, biodiversity, waste, and more. ‘Social’ factors are those linked to people (including employees) and communities. ‘Governance’ refers to how the organisation makes decisions and runs itself, including decisions about Environmental and Social factors.

How well an organisation manages these factors determines how sustainable it is in the long run, which is why the terms ‘ESG’ and ‘sustainability’ are linked or often used interchangeably.

In the past, there was little regulation or standardisation around how organisations measured and communicated their ESG performance. This made it difficult to compare one organisation’s performance with another’s.

Today we are moving to a world that expects organisations to provide comparable, standardised ESG information.

This is due to a growing recognition by world economic leaders of the link between quality of life now and in the future, and how organisations manage ESG factors. For example, one organisation might provide affordable housing (a social factor) while also contributing to air pollution and water scarcity (environmental factors). Another might make record profits by producing medicines that aren’t available to those who need them most (social and governance factors).

With the recognition of the link between ESG and quality of life, we are today seeing a mass global effort to direct the flow of money to organisations that contribute to positive ESG outcomes, or, at least, do minimum harm. We’re seeing this effort play out through a combination of government regulations and voluntary, socially driven movements.

The success of this global effort depends on the availability of comparable, standardised information so that allocators of capital (such as investors and banks) can make informed choices. It also makes it easier for sustainably-minded consumers to make purchasing decisions.

A number of different frameworks have emerged in recent decades to help guide organisations to provide standardised ESG information. However, the proliferation of frameworks – often referred to as the ‘alphabet soup’ of ESG reporting due to their acronyms – has only added to the confusion organisations experience about what ESG is and what information they should provide.

In 2021, the International Financial Reporting Standards (IFRS) Foundation formed the International Sustainability Standards Board (ISSB) to develop guidelines for disclosing standardised ESG information that met the needs of investors, similar to the way financial accounting has been standardised. The ISSB published the first of its disclosure standards, called IFRS S1 and IFRS S2, in 2023.

The ISSB’s disclosure standards are today considered the leading format for corporate ESG disclosure, along with disclosure standards governed by the Global Reporting Initiative. When used together, the two standards provide a good framework for considering double materiality.

To discuss your ESG management and reporting program and obtain a quote, book a 30 minute no-obligations virtual call.