ESG criteria are a cornerstone of sustainable development and responsible investment, and structure the non-financial reporting. They are used to evaluate the way in which companies consider sustainable development issues in their strategies and operations.
ESG criteria: presentation and background
These criteria have their roots in the 1990s, when attempts were first made to evaluate the sustainability of companies and financial securities. The ESG criteria can be seen as the modern descendants of the "three Ps" concept (People, Planet, Profit) developed in 1995 by entrepreneur John Elkington. They are now widely used in the finance world as the pillars of sustainable investment processes.
In the context of a company's Corporate Social Responsibility (CSR) approach, its financial performance will be closely linked to its social and environmental impact. ESG criteria allow us to measure the ethical dimensions of a company's investments. They provide a common standard for evaluating a company's CSR strategy, taking into account the social and environmental impacts of its activities. This makes it easier for investors and the general public to assess the sustainability of a company and its performance.
What are the ESG criteria and how are they assessed?
ESG criteria include 3 sets of extra-financial criteria:
Environmental criteria evaluate a company's impact on the environment and its efforts to reduce greenhouse gas emissions, conserve natural resources, and prevent industrial disasters. Examples of environmental criteria include reducing energy consumption and waste, promoting renewable energy, and protecting biodiversity.
Social criteria evaluate a company's impact on society and its efforts to promote social responsibility, diversity, and inclusiveness. Examples of social criteria include respecting workers' rights, promoting gender equality, investing in staff training, and preventing work-related accidents.
Governance criteria evaluate a company's management and its efforts to promote transparency, accountability, and ethical behavior. Examples of good governance criteria include the fight against corruption, the independence of boards of directors, and the transparency of executive compensation.
Rating agencies (such as Ethifinance, Vigeo, BMJ CoreRating or Innovest) evaluate companies according to various approaches, by sector or across all sectors. Some specialize in a single criterion, such as the environment.
What are the differences between CSR and ESG?
Corporate Social Responsibility (CSR) and Environmental, Social, and Governance (ESG) criteria are both related to the commitment of companies to sustainable development. However, there are important differences between the two concepts.
CSR refers to the voluntary actions taken by a company to address its social and environmental impacts. It encompasses a wide range of activities, from philanthropy and community engagement to environmental protection and ethical sourcing. Companies may engage in CSR activities for a variety of reasons, including to improve their reputation, to attract and retain employees, or to respond to consumer demand for socially responsible products and services.
In contrast, ESG criteria are a set of standardized metrics used to evaluate the sustainability performance of a company. They are typically used by investors to assess the environmental, social, and governance risks and opportunities associated with a company or investment. ESG criteria focus specifically on issues related to the environment, labor practices, human rights, and governance, and they are often used as a framework for assessing the sustainability of a company's operations and strategies.
While CSR and ESG criteria are related, they serve different purposes. CSR is a voluntary commitment that companies can make to address their social and environmental impacts, while ESG criteria are a standardized way of measuring a company's sustainability performance. While CSR activities may be influenced by ESG criteria, the two concepts are not interchangeable.
Why is it important for a company to consider ESG criteria?
Considering ESG criteria allows companies to integrate environmental and social issues into their overall management, as well as their responsibility in terms of governance. They help make responsible investment choices and enrich the analysis of companies' future financial performance, in terms of profitability and risk.
ESG reporting is also an integral part of the CSRD (Corporate Sustainability Reporting Directive), a new European Union directive which, as of 2021, brings together a set of measures aimed at promoting financial flows in favor of sustainable activities within the EU.
ESG criteria: what are the challenges for companies?
The integration of environmental, social and governance criteria is becoming increasingly important in the strategies of investors, who see responsible investment as a way of contributing to the SDGs (Sustainable Development Goals), achieve long-term returns, and reduce risks. Both small and medium-sized enterprises (SMEs) and large companies are affected by this trend, even if not all companies are subject to the legal requirement of non-financial reporting.
For small and medium businesses
While current laws still primarily target large groups and listed companies, they also tend to extend the extra-financial reporting obligations to more and more companies: this is already the case with the CSRD, whose measures will concern thousands of additional companies in France, with simplified standards for SMEs. It is crucial for SMEs, ETIs and start-ups to anticipate the integration of this analysis grid into the selection processes set up by management companies. In France, it is already certain that the laws already applied to companies with more than 500 employees will be extended to small structures within the framework of France's national low-carbon strategy.
The requirement to include a carbon footprint in the accounts of all companies is one of the proposals of the Citizens' Climate Convention, a convention that happened in France in 2020. Furthermore, the more private actors of all sizes show interest in ESG criteria, the more they will be simplified and accessible to small and medium-sized companies.
For large companies
Taking ESG criteria into account allows large companies to integrate social, environmental and governance issues into their overall management. The ESG reporting requirement can therefore improve a company's performance and enhance its image with partners, investors, and consumers. The integration of ESG criteria into a company's CSR approach is an asset for attracting potential investors. These criteria are indeed the basis of the labeling process of SRI (Socially Responsible Investment) funds: they meet both a search for performance and responsible orientation of one's savings.
In conclusion
ESG criteria serve as a structure and guide for the collection of data that will enrich non-financial reporting by evaluating a company's CSR strategy by taking into account the social and environmental impacts of its activities. They offer a common standard that simplifies companies' extra-financial reporting and makes it more readable, and therefore better assessable by the public and investors.
Many companies were waiting for clearer standards to implement their CSR strategy or to communicate about their approach. For consumers and investors, ESG criteria make it easier to expose attempts at greenwashing.
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