What is ESG? Definition, Criteria & More | UrbanFootprint (2024)

Environmental, social, and governance (ESG), are a set of criteria used to evaluate companies’ commitment to sustainable operations. In practice, these criteria could involve adhering to worker safety practices, finding ways to maximize energy efficiency, or ensuring diversity among a board of directors.

Over the past few years, new legislation and increased interest in ESG have raised the stakes for reporting transparency. Stakeholders use ESG criteria to identify and fund companies that share socially conscious intentions. While ESG scores have no impact on fiscal performance, companies that uphold ESG standards are commonly perceived as less risky, more conscientious investments.

For instance, an oil company may not seem like a risky investment at first. But if they employ bad practices, they could be hit with hefty water pollution penalties or other non-compliance fines that could hinder their long-term success. ESG frameworks should help organizations adopt strategies to improve their safety, social responsibility, and ethical standing. Likewise, that’s why many investors turn to ESG criteria: to help make investments that are in line with their values.

Many companies measure their own ESG performance, either in-house or via an ESG analytics firm. Organizations have a tendency to boast about their achievements, so investors usually verify ESG scores using an objective third-party provider.

Due to the climate crisis and COVID-19 pandemic, policymakers have enacted laws that push businesses to better protect their employees and the earth. In fact, the SEC has proposed rules to enhance and standardize ESG climate disclosures. These new and proposed regulations mean that companies will have to move beyond simply reporting their scores to showcase the ways they promote sustainability and human rights, remediate any bad practices, and implement strategies to lower ESG risks.

The environmental factors in ESG offer insight into a company’s current environmental impact, as well as its ability to mitigate future environmental risks. Criteria for environmental factors includes:

• Carbon footprint (in terms of indirect and direct emissions)
• Waste management policies
• Efforts to decrease deforestation
• Natural resource conservation
• Treatment of animals

Environmental factors confirm whether or not a company’s treatment of the planet is ethical and complies with governmental regulations.

The social aspect of ESG speaks to a company’s treatment of stakeholders, who could be employees, customers, suppliers, or even the local community. Social criteria affect a company’s approach to:

• Managing social vulnerability due to disease, injury, natural disasters, or human-caused disasters
• Protecting disadvantaged or priority populations (racial and ethnic minorities, low-income, children and adolescents, women, individuals with special healthcare needs, and the elderly)
• Community health and demographic risk due to age or location
• Community relations
• Employee wages and salaries
• Workplace policies surrounding diversity, inclusion, and equity
• Prevention of sexual harassment at the workplace
• Level of employee turnover
• Worker health and safety
• Product safety
• Customer relationship management
• Charitable contributions

On the whole, social factors of ESG are concerned with company relationships and community-standing

Governance factors assess whether a company’s internal processes ensure employees act with professionalism and integrity. Governance criteria include:

• Accurate and transparent accounting methods
• Appropriate audit committee structure
• Lack of bribery and corruption
• An examination of political contributions and lobbying efforts
• Reasonable executive remuneration

In general, governance factors verify that organizations prevent conflicts of interest, operate in good faith, and promote transparency among their employees and stakeholders.

Naturally, there are strengths and weaknesses of ESG criteria. Critics of the ESG paradigm claim that socially responsible investing detracts from profitable investments. Two sectors with the most potential for sky-high profits are tobacco and defense一areas typically antithetical to ESG.

There is also the argument that moving exclusively towards socially responsible investing decreases the diversity of a company’s portfolio and makes businesses operate less efficiently.

While these theories are up for debate, it is truethat ESG is tough to measure. There’s no formal standardization within ESG criteria, which makes it a challenge to compare scores across companies. For these reasons, analysts that oppose ESG argue that organizations should review a company’s quarterly profits and other financial statements to qualify their investments instead.

But other analysts disagree. Today’s data analytics providers can accurately process and consolidate ESG metrics to identify top-performing ESG companies. Plus, proponents believe that investing in socially responsible companies is often more beneficial in the long run. If an ESG-related scandal occurs, companies could be hit with heavy fines, lose customers’ trust, and suffer from other adverse effects of a poor brand reputation.

Companies with high ESG scores are also more likely to retain and attract customers who care about ESG. For advocates of ESG, the benefits of achieving ESG criteria outweigh the potential negatives. Ultimately, the goal of ESG is to inspire real change in investing. Companies should make equitable investments for the sake of improving society一not just for positive optics.

While there are pros and cons to ESG, reducing environmental impact, improving social factors, and instituting honorable practices only boost an organization’s credibility and performance. Organizations that recognize the importance of ESG and are able to adapt to it will have a competitive edge over the rest. As policymakers and consumers continue to push for greater ESG transparency, companies that are unwilling to adapt new practices may be left behind.

As the significance of ESG grows, so does the importance of using advanced analytics tools to help you reach your ESG goals. Since each ESG criteria is inextricably linked, attempting to improve one factor may have unforeseen consequences on another. UrbanFootprint can help you identify the correct path forward: their advanced analytics can run scenarios to help you understand the full context and impact of decisions.

Urban Footprint’s data analytics system parses complex intersections of data, providing a more holistic view of ESG criteria. With UrbanFootprint, users can tie granular urban, environmental, and mobility data to gain unparalleled insight into the potential impact of climate change, policy, and business conduct on local, state, and national communities. Equipped with accurate, relevant data, UrbanFootprint users can make more informed, effective, and equitable decisions.

Eager to try it out for yourself? Contact our sales team to learn more about how UrbanFootprint can empower data-driven ESG decisions.