ESG Criteria: A Complete Guide to Sustainable Investments
Reading 11 min
February 22, 2025
Summary
ESG (Environment, Social and Governance) criteria have become key benchmarks for assessing corporate responsibility and sustainability. They allow investors, consumers and regulators to measure organizations' commitment to sustainable development and ethics. Faced with growing demand and stricter regulations, ESG criteria are emerging as a strategic lever for increasing transparency, attracting funding and ensuring sustainable performance over the long term.
Start your decarbonized future in good hands
% of article read
What are ESG criteria?
Definition of ESG criteria
ESG criteria (Environment, Social and Governance) are standards for assessing the responsibility and sustainability of companies and organizations. These criteria take into account their environmental impact (carbon footprint, resource management), their social commitment (working conditions, diversity, stakeholder relations) and their governance practices (transparency, ethics, independence of boards of directors).
These different criteria were created to help investors choose responsible companies. ESG criteria are now a key lever for sustainable finance and risk management. More and more organizations are adopting these principles in order to improve their image, attract investors and meet the expectations of consumers and regulators.
Your free carbon footprint awaits!
Register for our free trial, answer 20 questions, and receive your first carbon footprint!
Why are ESG criteria important?
ESG criteria are essential because they allow companies to assess their sustainability and responsibility, beyond their financial performance alone. They help investors identify companies committed to sustainable practices, thereby reducing risks related to environmental, social and governance issues.
In addition, they promote transparency and trust among stakeholders, particularly consumers and employees. With the rise of regulations and societal expectations, integrating ESG criteria has become a competitive advantage for all companies wishing to improve their brand image and attractiveness. Finally, ESG criteria encourage the development of more resilient business models in the face of climate crises and regulatory changes.
What is the difference between CSR and ESG?
CSR (Corporate Social Responsibility) and ESG (Environment, Social and Governance) are two complementary but distinct approaches. CSR is a voluntary approach adopted by companies to integrate social and environmental issues into their strategy. It is based on internal commitments and initiatives specific to each organization. ESG, on the other hand, is an evaluation framework used mainly by investors to measure the sustainable performance of a company. It is based on quantifiable criteria and ratings that allow different organizations to be compared with each other.
What are the three pillars of ESG criteria?
Environment (E)
The Environment pillar of ESG criteria assesses a company’s impact on the environment and its management of natural resources. It encompasses several key aspects such as:
- Reducing CO₂ emissions: Companies must limit their carbon footprint by optimizing their energy consumption and adopting renewable energies.
- Waste management and recycling: Adopting circular economy practices and waste reduction is a fundamental criterion within the framework of ESG criteria.
- Preservation of biodiversity: Companies are assessed on their impact on ecosystems and their commitment to protecting nature.
- Use of natural resources: Sustainable management of water, raw materials and energy is essential to minimize environmental impact.
Improving environmental performance allows companies to comply with regulations, reduce their costs and attract investors who are sensitive to ecological issues.
Social (S)
The Social pillar of the ESG criteria assesses the impact of companies on their employees, customers, suppliers and society in general. It covers several aspects:
- Working conditions and employee well-being: Companies must ensure safe working conditions, offer fair wages and promote work-life balance.
- Diversity and inclusion: Commitment to equal opportunities, diversity and the fight against discrimination is an element of the ESG criteria.
- Respect for human rights: Companies must avoid any involvement in human rights violations, such as forced or child labour among their suppliers.
- Stakeholder relations: The impact on local communities, respect for consumers and transparency in business practices are also important criteria.
- Societal commitment: Companies that invest in social initiatives, such as access to education or health, strengthen their positive impact.
A good score on the social criterion improves the company’s reputation and strengthens employee and customer loyalty.
Governance (G)
The Governance pillar of the ESG criteria assesses the way a company is managed, its transparency and its ethical practices. Good governance is essential to ensure the trust of investors, employees and stakeholders.
- Board structure and independence: A diverse, independent and competent board is essential to ensure informed decision-making and avoid conflicts of interest.
- Transparency and business ethics: Regular publication of financial performance, risks and ESG commitments strengthens the trust of investors and partners.
- Anti-corruption and regulatory compliance: Anti-corruption and compliance policies are essential to avoid scandals and sanctions.
- Executive compensation: Compensation aligned with the company’s sustainable performance and the interests of stakeholders is one of the ESG criteria.
- Shareholder Rights: Ensuring open dialogue with shareholders and giving them a voice in strategic decisions ensures better governance.
Strong governance reduces risks, improves long-term performance and strengthens the company’s credibility in financial markets.
How to decarbonize your company ?
Enter your email address and access immediately our 30-minute webinar. Discover our experts' strategic advice for decarbonizing your business.
How to assess a company’s ESG performance?
The main ESG indicators
ESG indicators are used to assess a company’s performance in environmental, social and governance matters. They are essential for investors, regulators and stakeholders to measure the sustainable impact of an organisation.
- Environment (E): Carbon footprint (CO₂ emissions with scopes 1, 2 and 3), energy consumption, use of natural resources, waste management and impact on biodiversity.
- Social (S): Working conditions, diversity and inclusion rate, employee safety, respect for human rights, stakeholder relations and social impact of products/services.
- Governance (G): Independence of the board of directors, financial transparency, anti-corruption policy, executive compensation and shareholder protection.
These indicators are often included in extra-financial reports and assessed by ESG rating agencies to compare company performance and guide investment decisions.
ESG assessment tools and methodologies
ESG assessment is based on different tools and methodologies that allow the analysis of a company’s performance in environmental, social and governance matters. These approaches aim to guarantee an objective and comparable measurement of sustainable commitments.
The tools used are as follows:
- International standards and benchmarks: GRI (Global Reporting Initiative), SASB (Sustainability Accounting Standards Board) and the UN Sustainable Development Goals (SDGs).
- ESG ratings: Provided by specialized agencies such as MSCI, Sustainalytics, Moody’s ESG Solutions or EcoVadis, they assign scores based on predefined criteria.
- ESG stock market indices: DJSI (Dow Jones Sustainability Index), FTSE4Good and MSCI ESG Index.
- Technological tools: Solutions based on artificial intelligence and big data to collect and analyze extra-financial data.
These methodologies enable investors and companies to manage their ESG strategies more effectively.
Who performs ESG ratings?
ESG ratings are assigned by specialized agencies that evaluate companies on their environmental, social and governance practices. These agencies use methodologies based on specific indicators to assign an ESG score, thus influencing the decisions of investors and stakeholders.
- ESG rating agencies: Among the most recognized are MSCI ESG Ratings, Sustainalytics, Moody’s ESG Solutions, ISS ESG and EcoVadis.
- ESG stock indices: Some indices such as the Dow Jones Sustainability Index (DJSI) and FTSE4Good include companies with good ESG performance.
- Independent organizations and consulting firms: They carry out extra-financial audits and sector analyses to help companies improve their ESG strategy.
ESG and responsible investment
Why do investors take ESG criteria into account?
Investors are integrating ESG criteria into their decisions in order to better assess long-term risks and opportunities. A company with good ESG performance is perceived as more resilient, better prepared for environmental and social challenges, and less exposed to governance scandals.
By taking ESG criteria into account, investors seek to reduce risks related to climate issues, social conflicts or questionable ethical practices. In addition, they promote sustainable profitability by focusing on innovative companies aligned with the ecological transition. Taking ESG criteria into account in investors’ choices also allows them to meet market expectations, particularly those of consumers and regulators who demand more transparency and social responsibility. Responsible investment is thus becoming a strategic lever for combining financial performance and positive impact.
The rise of sustainable finance and ESG funds
Sustainable finance is experiencing exponential growth, driven by increased investor demand for responsible investments. ESG funds therefore integrate environmental, social and governance criteria into their investment strategies, thus promoting companies committed to sustainable development.
This growth is encouraged by:
- Stricter regulation, such as the EU green taxonomy and the SFDR.
- A growing awareness among investors, who are seeking to reconcile financial performance and positive impact.
- Attractive performance, with ESG funds often posting competitive results compared to traditional investments.
Thanks to these different factors, ESG funds are becoming an essential pillar of responsible finance.
Impact of ESG criteria on company valuation
ESG criteria also play a key role in the valuation of companies, influencing their attractiveness to investors and stakeholders. Good ESG performance often allows access to advantageous financing and attracts investors concerned about sustainability.
By integrating responsible practices, companies reduce financial risks, such as regulatory sanctions. In addition, effective ESG management can improve long-term profitability, by optimizing energy efficiency, governance and employee satisfaction. As a result, companies with good ESG scores are generally better valued on the financial markets.
How to integrate ESG criteria into a company’s strategy?
Steps to implement an ESG approach
Implementing an ESG approach within an organization requires following several key steps:
- Analysis and diagnosis: Assess the company’s current environmental, social and governance impact using indicators and audit tools.
- Defining ESG objectives: Set clear and measurable objectives aligned with the overall strategy and stakeholder expectations.
- Implementing actions: Integrate ESG best practices into internal processes, the supply chain and partner relationships.
- Monitoring and evaluation: Regularly measure progress using ESG indicators and adjust the strategy based on the results obtained.
- Communication and transparency: Publish ESG reports to inform investors, customers and employees about the company’s commitments and progress.
The challenges of ESG integration
Despite their many benefits, integrating ESG criteria can be a challenge for many companies:
- Complexity of data collection: Identifying and measuring relevant ESG indicators can be difficult, especially for SMEs.
- Cost of compliance: Implementing ESG initiatives requires significant investments, including training, technology and audits.
- Lack of uniform regulation: ESG requirements vary from country to country, making it difficult to standardize practices.
- Resistance to change: Some companies perceive ESG as a constraint rather than an opportunity.
- Greenwashing: A risk of misleading communication may exist if the company does not implement concrete and measurable actions to achieve its ESG objectives.
What are the advantages and limitations of ESG criteria?
The advantages of an ESG approach
Adopting an ESG approach has many advantages for companies:
- Improved reputation: A solid ESG policy strengthens the brand image and the trust of consumers, investors and partners.
- Easier access to financing: Investors favor responsible companies, facilitating access to ESG funds and sustainable finance.
- Reduced risks: Applying ESG criteria helps anticipate environmental, social and governance risks, thus limiting financial and legal impacts.
- Attractiveness and retention of talent: Committed companies attract more employees and their motivation increases.
- Competitive advantage: A well-defined ESG strategy allows for innovation and differentiation on the market.
- Compliance with regulations: Anticipating new ESG standards helps avoid potential sanctions and prepare for future legal obligations.
Limitations of the ESG model
Although increasingly adopted, the ESG model also has drawbacks and limitations:
- Lack of standardization: There is no universal framework for ESG assessment, which can lead to differences in interpretation and rating.
- Risk of greenwashing: Some companies adopt ESG strategies mainly to improve their image without really transforming their practices.
- Lack of transparency: ESG rating methodologies vary between agencies, making it difficult to compare companies.
- Uncertain financial impact: While ESG can improve long-term performance, some investors remain skeptical about its immediate profitability.
- Complexity of implementation: Integrating ESG criteria requires resources and regular monitoring, which can be restrictive for SMEs.
The future of ESG criteria: what developments can we expect?
Regulations and new ESG requirements
ESG regulations are becoming stronger to regulate corporate practices and ensure greater transparency. In Europe, the Corporate Sustainability Reporting Directive (CSRD) requires large companies to publish detailed reports on their ESG performance. In the United States, the SEC (Securities and Exchange Commission) is developing similar requirements for listed companies. In addition, the EU Green Taxonomy defines precise criteria to distinguish sustainable activities. With these developments, companies must strengthen their compliance and adapt their strategies to meet the expectations of regulators, investors and consumers.
The impact of technological innovations on ESG
Technological innovations play a key role in improving companies’ ESG performance. Artificial intelligence and big data make it possible to analyze and optimize environmental strategies, in particular by reducing CO₂ emissions. Blockchain ensures increased transparency in the supply chain, thus strengthening the traceability of ESG commitments. Renewable energies and carbon capture technologies also contribute to reducing the ecological impact of industries. Thanks to these various advances, companies can better measure, improve and communicate their ESG commitments, thus strengthening their attractiveness to investors and consumers.
Changing consumer and investor expectations
Consumers and investors are increasingly attentive to companies’ ESG commitments. They favor responsible brands, promoting transparency, ethics and sustainability. New generations expect companies to adopt practices that respect the environment and human rights. On the investor side, ESG criteria now influence investment decisions, pushing companies to integrate these issues into their strategy. This evolution reflects a growing demand for sustainable business models, aligned with current societal and environmental concerns.
