ESG has become an essential criterion for evaluating companies and guiding investments. This comprehensive guide explains everything you need to know: definition of the three pillars (Environmental, Social, Governance), evaluation methodology, and concrete applications in business. We also address the limitations of ESG and alternatives that prioritize real environmental impact, such as carbon quotas.
ESG has become an essential criterion for evaluating companies and guiding investments. This comprehensive guide explains everything you need to know: definition of the three pillars, evaluation methodology, and concrete applications in business. We also address the limitations of ESG and alternatives that prioritize real environmental impact.
The acronym ESG refers to three criteria used to evaluate the non-financial performance of companies: Environmental, Social, and Governance.
These criteria allow for an analysis of how an organization integrates sustainable development issues into its strategy and operations:
ESG has its roots in the socially responsible investment movements of the 1960s and 1970s. However, the term itself emerged in the early 2000s. It was formalized in 2004 in a UN report titled "Who Cares Wins."
ESG has experienced a boom since the 2010s due to several factors:
Today, ESG is essential. On one hand, institutional investors manage significant amounts of assets under ESG management. On the other hand, companies face growing regulatory obligations, particularly in Europe with the CSRD, which makes non-financial reporting mandatory.
ESG differs from Corporate Social Responsibility (CSR) in its quantifiable approach. While CSR is often declarative, ESG criteria are based on measurable data. This approach can allow investors and partners to compare companies on their sustainable performance.
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The environmental pillar evaluates the direct and indirect impact of companies on the environment.
Greenhouse gas emissions are the main criterion. They are measured across three scopes:
Natural resource management represents a second major evaluation axis. This includes water consumption, raw material use, waste production, and recycling. Thus, the industrial sector is progressively integrating the principles of the circular economy to reduce its dependence on virgin resources.
Finally, the preservation of biodiversity must not be forgotten, particularly for companies whose activities directly impact natural ecosystems. Criteria include habitat protection, sustainable land management, and impact on protected species.
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The social component focuses on human relations within and around the company.
Working conditions are the primary evaluation criterion. Assessed aspects include workplace safety, employee training, work-life balance, compensation, and social benefits.
This pillar also concerns diversity and inclusion: representation of women in leadership positions, equal pay between men and women, integration of minorities and people with disabilities. For example, in France, a law has mandated a minimum quota of 40% women on the boards of large companies since 2012.
Societal impact extends to society as a whole. This includes local job creation, partnerships with associations, and respect for human rights – a significant point for international supply chains.
The governance pillar evaluates the quality of management and decision-making processes within the company.
Transparency is a fundamental criterion. It considers the publication of financial and non-financial information and the accessibility of data for stakeholders and the general public.
Governance also encompasses ethics: combating corruption, respecting fair competition, integrity of business practices, and protection of personal data. Companies must demonstrate the existence of codes of conduct, procedures for reporting breaches, and sanctions in case of non-compliance.
The governance structure is also evaluated, with criteria such as the independence of the board of directors, the separation of the roles of chairman and CEO, the diversity of executive profiles, and executive compensation.
ESG performance is evaluated by non-financial rating agencies. Examples include MSCI, Sustainalytics, ISS ESG, Refinitiv, Vigeo Eiris, and EcoVadis. Each develops its own criteria, weightings, and rating scales.
Their evaluation processes combine several data sources: public data, public company reports, ESG questionnaires and interviews, journalistic work, and NGO data. They examine both declared policies and actual performance measured by quantitative indicators.
However, these methodologies have significant limitations. The same company can receive very different scores depending on the rating agency. A MIT study showed that the correlation between ESG scores from different agencies was only 0.54, whereas credit ratings from Moody's and Standard & Poor's were correlated at 0.92.
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Several international standards exist worldwide, including:
At the European level, harmonization also involves:
Before implementing an ESG approach, an assessment of the existing situation is necessary. The company must identify its current environmental, social, and governance impacts, as well as the risks and opportunities related to its sector of activity. This analysis helps prioritize actions.
To define the ESG strategy, the company sets quantified objectives and a timeline for implementation. The objectives must be aligned with the company's activity and its capacity for action. For example, an industrial leader can focus on reducing its carbon emissions. A service company, on the other hand, will prioritize social issues such as diversity or employee training.
Success largely depends on internal organization. Many companies appoint a Chief Sustainability Officer (or CSR Director), if not already done, and create an ESG committee at the board level. With good governance, actions are coordinated within the company, and the strategy is implemented.
Once the ESG strategy is on track, ESG reporting allows for measuring progress. This approach responds to growing regulatory obligations, particularly in Europe with the CSRD, but also to the expectations of investors and stakeholders.
Data collection often represents the main challenge for companies. They must implement systems to track their CO2 emissions, social indicators, and governance practices. Several departments are mobilized: human resources, procurement, finance, etc.
Once the information is collected, the results can be communicated in a sustainability report. This document, which presents the ESG strategy, objectives, actions taken, and results obtained, must comply with current standards and legislation.
ESG strategies vary depending on the sector of activity and the specific challenges of each company.
Let's look at 4 examples:
ESG faces several major challenges that question its effectiveness.
Like CSR, ESG is not immune to accusations of greenwashing. And for good reason: some companies use ESG criteria to improve their image without fundamentally changing their practices. The multiplicity of standards and the lack of sufficient controls encourage these deviations.
The lack of standardization also poses a problem. As we have seen, the same company can obtain very different ESG scores depending on the rating agency. Objectively comparing companies is a real headache for investors.
Furthermore, the emphasis on criteria rather than actual impact is raising increasing questions. Some experts point out that ESG measures the quality of processes and policies more than the actual impact. This allows companies like Coca-Cola to be well-rated on the ESG front.
Facing "theoretical" ESG criteria, a new approach prioritizes real results. Because ultimately, what matters is the measurable impact on the physical world: the concentration of greenhouse gases in the atmosphere, temperature changes, or the living standards of populations.
Concretely, this can translate into targeted investments in tangible results. In other words, choosing to invest directly in mechanisms with demonstrable physical impact, rather than relying on uncertain ESG scores.
European carbon quotas illustrate this approach: each purchased quota permanently removes one ton of CO2 from the market, directly contributing to the reduction of industrial emissions.
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This is what we advocate at Homaio. We offer investors the opportunity to act directly on greenhouse gas emissions, while maximizing their financial performance. This pragmatic approach prioritizes measurable impact on the physical indicators of climate change, offering a concrete alternative to traditional ESG investments.
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