ESG criteria: definition and importance
What are ESG criteria?
ESG stands for Environmental, Social, and Governance. It's a set of criteria that investors use to evaluate companies according to their impact on the environment, society and corporate governance.
ESG criteria are used to measure the environmental and social impact of an investment in a company.
Why is this important?
ESG criteria are essential because they help investors to evaluate companies based on their impact on the environment, society and corporate governance.
Thanks to ESG criteria, it is possible to measure theethical impact investment in a company. Companies taking part in these criteria are often considered to be more sustainable and cost-effectiveover the long term.
In 2024It's essential for every company to take part in these standards, as climate problems mount and individuals become increasingly aware of them.
The 3 ESG criteria
As explained above, the three ESG criteria are: Environmental, Social, and Governance. Find out more about these criteria.
Environmental
"Environmental" refers to the environmental dimension of ESG criteria. It measures the impact of a company's activities on the environment, in particular its CO2 emissionshis electricity consumption, the waste recyclingas well as its contribution and impact to the conservation ofenvironment and biodiversity.
Some ISO standards, such as ISO 14001 (environmental management system) can help you check whether a company complies with the "environmental" criterion.
Examples of environmental metrics
- Greenhouse gas emissions
- Air and water pollution levels
- Deforestation levels
- Recycling and waste management
- Carbon footprint
Social
"Social" refers to the social dimension of ESG criteria. It measures the impact of a company's activities on its stakeholders. employees, customers, and suppliers and checks that it complies with values such as the safety at worka fair remunerationrespect for working conditions, the consumer healthetc.
The social aspect of ESG criteria is directly related to thesocially responsible investment (SRI)SRI is a socially responsible investment strategy. SRI favors companies that respect values such as diversity, inclusion, social justice and the fight against discrimination.
Examples of social metrics
- Supply chain management
- Compliance with labor standards
- Compliance with minimum wages
- Consumer protection measures (LPD)
- Diversity and inclusion policies
Governance
"Governance" refers to the corporate governance dimension of ESG criteria. It measures a company's management practices, including its transparency as well as the control measures put in place against the corruption.
This criterion also implies that the company uses transparent accounting methodsthat the executive selection is made in a ethics and that she is manager in front of shareholders.
Examples of governance metrics
- Board diversity
- Compliance with ESG reporting standards
- Shareholders' rights
ESG reporting standards
Several organizations have set ESG reporting standards.
Sustainable Finance Disclosure Regulations (SFDR)
The Sustainable Finance Disclosure Regulation (SFDR) is a European regulation designed to strengthen the transparency of financial information. transparency in the sustainable investment productsand to fight against greenwashing practiced by financial market players.
SFDR imposes full disclosure requirements and covering a large number of ESG parameters.
European Sustainability Reporting Standards (ESRS)
ESRS standards (European Sustainability Reporting Standards) were drawn up as part of the Corporate Sustainability Reports (CSRD) established by the European Parliament and the Board. These 12 standards play an essential role in the promoting sustainability and transparency with approximately 50,000 companies in theEU and their foreign subsidiaries or branches. The aim is to improve quality and report coverage on the sustainable development companies.
The CSRD includes more in-depth information on the company's sustainable development in its annual reports. In addition, they have to comply with specific stringent requirementsThese include qualitative and quantitative indicators that have an impact on various aspects of ESG criteria.
Global Reporting Initiative (GRI) standards
The standards introduced by Global Reporting Initiative (GRI) enable companies to assess and communicate their environmental, socio-economic and societal impacts.
These standards first saw the light of day in 2000, but were officially introduced by GRI in 2016.
Sustainability reporting standards (IFRS)
Two standards, IFRS S1 and IFRS S2form the "IFRS Sustainability Disclosure Standards" . They were created in response to the demand for information on how companies are managing risks and opportunities related sustainable development.
Companies must apply both standards jointly in order to comply with these standards, while still being able to focus on climate-related information in the first year.
SASB standards
SASB standards (Sustainability Accounting Standards Board) help companies to disclose sustainability-related risks and opportunities that affect their cash flow, access to financing or cost of capital in the short, medium or long term. These standards identify key issues for investor decision-making in 77 business sectors. The SASB standards are one of the most important standards for investors seeking information on sustainable development.
In August 2022, the ISSB of the IFRS Foundation took over the SASB standards, undertaking to maintain and improve them. IFRS S1 and IFRS S2 are therefore directly linked to SASB standards.
