ESG Criteria: A Complete Guide to Sustainable Investments

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 has experienced significant growth for several years. This increase is due to increased demand from investors and regulators for responsible investments aligned with climate, social, and governance issues. ESG funds, which integrate these criteria into their investment strategies, are now essential pillars of global finance.

According to Morningstar data, global ESG assets under management will exceed $28 trillion in 2023, compared to only $10 trillion ten years earlier. This growth is strongly driven by regulations strengthening transparency and oversight of sustainable investments, such as the European Union’s Green Taxonomy, the Sustainable Finance Disclosure Regulation (SFDR), and IFRS standards.

Thus, ESG funds are no longer limited to green stocks or climate bonds. They now cover a wide range of asset classes, from sustainable infrastructure to impact private equity, including funds integrating ESG criteria. Numerous studies show that the financial performance of ESG funds is often comparable to, or even superior to, that of traditional funds, particularly over the long term.

By directing capital toward responsible and innovative companies, sustainable finance is becoming a powerful driver of ecological, social, and economic transition. It supports companies in their transformations while meeting the new expectations of investors, consumers, and regulators.

Impact of ESG criteria on company valuation

The integration of ESG criteria directly influences company valuation, both financially and on their reputation among investors, partners, and consumers. Today, financial markets are paying increasing attention to non-financial performance, considered an indicator of resilience and long-term sustainability.

Companies with good ESG scores often benefit from better access to sustainable financing, whether through preferential-rate bank loans, green bond issues, or responsible investment funds. Many banks and financial institutions now integrate ESG criteria into their credit risk assessments, considering that a sustainable company presents fewer operational, legal, or reputational risks.

Furthermore, institutional investors, particularly pension funds, insurance companies, and sovereign wealth funds, systematically integrate ESG criteria into their investment policies. These players favor companies that can demonstrate their commitment to sustainability and good governance. As a result, a company with a solid ESG strategy becomes more attractive, particularly on the stock markets, which can translate into a higher valuation and greater price stability.

How to integrate ESG criteria into a company’s strategy?

Steps to Implementing an ESG Approach

Implementing an ESG approach within an organization requires several key, progressive steps to ensure effective integration of environmental, social, and governance issues.

1. Initial Analysis and Diagnosis

The first step consists of conducting an in-depth assessment of existing practices. This audit phase identifies the company’s specific ESG impacts, risks, and opportunities, based on quantitative and qualitative indicators. It is essential to cross-reference multiple sources of information: internal data, stakeholder interviews, industry benchmarks, international standards (GRI, SASB, etc.).

2. Defining Strategic ESG Objectives

Once the diagnosis has been completed, the company must define clear ESG objectives, consistent with its overall strategy and industry-specific challenges. These objectives must be specific, measurable, achievable, realistic, and time-bound (SMART). They must also take into account the expectations of various stakeholders (employees, customers, investors, etc.).

3. Implementation and Deployment of Actions

The operational phase consists of integrating ESG objectives into all company processes: production, purchasing, logistics, human resources, marketing, etc. This involves raising awareness among teams, mobilizing suppliers and partners, and implementing concrete action plans.

4. Monitoring, Evaluation, and Continuous Improvement

Progress must be tracked using appropriate ESG indicators and integrated into the company’s management tools. This regular assessment allows for adjustments to actions, identification of areas for improvement, and fueling a dynamic of continuous improvement.

5. Communication, Reporting, and Transparency

Finally, it is crucial to report on ESG progress through clear, accessible, and verifiable non-financial reports. This transparency strengthens the credibility of the approach and helps build loyalty among investors, customers, and employees.

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.

Internal ESG Awareness and Training

The integration of ESG criteria cannot be fully effective without the buy-in and involvement of employees. Indeed, the success of an ESG strategy depends as much on the actions of top management as on the commitment of all teams. To achieve this, companies must invest in awareness-raising and internal training.

The first step is to integrate ESG issues into the company’s culture and values. This requires clear communication on the commitments made, the objectives set, and the expected benefits. Thus, involving employees from the very beginning of defining ESG priorities strengthens their motivation and sense of belonging.

Training on ESG issues must be offered at all levels of the organization. This can include understanding ESG criteria, combating discrimination, optimizing environmental practices, or ethical business management. This training can take the form of workshops, e-learning modules, or seminars led by experts.

Finally, to encourage ownership of ESG issues, it is advisable to promote internal best practices and highlight employees who lead sustainable initiatives. Creating ambassador networks or thematic working groups helps strengthen internal momentum and disseminate best practices within various departments.

The role of stakeholders in ESG

Stakeholders play a central role in the development and success of ESG strategies. They are not limited to shareholders or customers, but encompass a broader ecosystem including employees, suppliers, NGOs, local communities, public authorities, and the media.

Consumer expectations, increasingly sensitive to ethical and environmental commitments, are encouraging companies to review their practices to preserve their brand image. NGOs and citizen movements are also exerting increasing pressure, denouncing controversial practices and pushing companies to be more transparent.

Furthermore, shareholders are increasingly using ESG criteria to make their voices heard at shareholder meetings, request governance changes, or influence strategic decisions.

Thus, companies that involve their stakeholders in developing their ESG strategy strengthen their legitimacy and anticipate market expectations. Establishing regular dialogues, consultations, or multi-stakeholder panels helps identify priority issues, adjust objectives, and build trust.

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.

ESG, SRI, and Impact Investing: What are the differences?

In the world of sustainable finance, the concepts of ESG, SRI (Socially Responsible Investment), and Impact Investing are often confused. Although similar, they refer to distinct approaches that meet complementary objectives.

ESG refers to a set of non-financial criteria used to assess a company’s sustainable performance. These criteria are used as analytical tools by investors to integrate environmental, social, and governance issues into their investment decisions. The ESG approach therefore aims to complement traditional financial analysis with an assessment of risks and opportunities related to sustainable development. It does not necessarily exclude controversial sectors, but seeks to favor the highest-rated companies in each sector.

SRI is an investment approach that integrates ESG criteria but goes further by applying exclusion or positive selection filters. SRI favors companies or funds that adhere to strict ethical standards or achieve the highest ESG ratings. SRI strategies may include sector exclusions (weapons, tobacco, fossil fuels) or thematic selections (renewable energy, healthcare, etc.). The goal is to combine financial performance with social commitment.

Finally, impact investing aims to intentionally generate a measurable positive social or environmental impact, in addition to a financial return. This approach targets projects or companies that provide concrete solutions to major challenges (access to water, clean energy, social inclusion, etc.). Impact investing is generally more engaged and focused on change.

Thus, ESG is an analytical tool, SRI is a responsible investment strategy, and Impact Investing is an investment approach with a transformative and measurable goal. 

The European Green Taxonomy

The European Green Taxonomy is a tool established by the European Union to guide investments towards sustainable economic activities. It is part of the European Green Deal and aims to strengthen the transparency of financial markets by clearly defining what can be considered an environmentally sustainable activity.

Until now, the lack of precise definitions has left room for subjective interpretations, paving the way for greenwashing practices. The Green Taxonomy establishes scientific and objective criteria to determine whether an activity contributes substantially to at least one of the six environmental objectives set by the EU:

• Climate change mitigation.
• Climate change adaptation.
• Sustainable use and protection of aquatic and marine resources.
• Transition to a circular economy.
• Pollution prevention and reduction.
• Protection and restoration of biodiversity and ecosystems.

The Green Taxonomy is primarily aimed at large companies, institutional investors, and financial institutions. These companies must now publish information on the proportion of their activities, investments, and loans aligned with this classification. The sectors concerned include energy, construction, transportation, agriculture, and green technologies.

Integrating the green taxonomy into their strategy allows companies to strengthen their credibility, attract sustainable financing, and anticipate regulatory requirements. It is also a lever for differentiating themselves in markets that are increasingly sensitive to climate issues.

ESG in SMEs: Challenges and Opportunities

While ESG criteria are often associated with large corporations and multinationals, they also apply to SMEs and mid-sized companies (ISEs). Integrating an ESG approach is no longer reserved solely for large groups: it has become a strategic and differentiating issue for all companies, regardless of their size.

One of the main obstacles to the adoption of ESG criteria for SMEs lies in the complexity and cost of implementation. Collecting data, preparing reports, and implementing environmental or social policies represents an investment in time and resources, often perceived as a constraint. Furthermore, SMEs rarely have dedicated CSR or sustainable development departments, making the integration of these criteria more difficult.

However, integrating ESG criteria can become a powerful lever for these companies. Indeed, it allows them to:

• Easier access to bank financing or tenders where ESG criteria are required. Strengthen their appeal to talented individuals and younger generations.
• Differentiate themselves from competitors by highlighting concrete commitments.
• Anticipate future regulatory requirements, particularly regarding non-financial reporting.

Simplified and tailored tools exist to support SMEs in their ESG approach, such as the D-Carbonize software, digital ESG reporting platforms, sector-specific labels, and ESG assessments offered by specialized organizations. These solutions allow for a structured, step-by-step approach, taking into account the realities and capabilities of small businesses.

The future of ESG criteria: what developments can we expect?

ESG regulations and new requirements

Faced with the climate and social emergency, ESG regulations are becoming more stringent worldwide, requiring companies and financial players to report their non-financial performance in a more transparent and structured manner. These new requirements aim to standardize practices, limit greenwashing, and direct financial flows toward truly sustainable activities.

The European Union is at the forefront of this regulatory transformation with the implementation of the Corporate Sustainability Reporting Directive (CSRD), which replaces and expands the NFRD. Starting in 2024, this directive requires more than 50,000 companies to publish detailed reports on their ESG impacts, according to harmonized European standards (ESRS). At the same time, the European Green Taxonomy defines precise criteria for identifying economic activities that contribute significantly to the EU’s environmental objectives.

In the United States, the Securities and Exchange Commission (SEC) is working to strengthen climate reporting for listed companies, with proposals to make disclosures on greenhouse gas emissions (including Scopes 1, 2, and 3) and material climate risks mandatory. In Asia, financial centers such as Singapore, Hong Kong, and Japan are also accelerating the adoption of strengthened ESG frameworks to attract responsible investment.

The Impact of Technological Innovations on ESG

Technological innovations play a decisive role in improving companies’ ESG performance. They not only enable better measurement and management of sustainable commitments, but also optimize internal processes, enhance transparency, and innovate in environmental and social solutions.

Artificial intelligence and big data offer unprecedented opportunities for collecting, processing, and analyzing massive volumes of ESG data. These technologies make it possible to automate regulatory monitoring, assess carbon footprints across the entire value chain, and detect social and ethical risks through predictive analytics. AI-based ESG reporting platforms also facilitate the production of non-financial reports that comply with current standards, thus reducing costs and human error.

Blockchain is also emerging as an effective tool for ensuring the traceability of ESG commitments, particularly in complex supply chains. By guaranteeing data inviolability, it allows companies to certify the responsible origin of raw materials, track suppliers’ carbon emissions, and verify compliance with human rights. Initiatives are also emerging around green smart contracts, which automatically condition financing or bonuses on the achievement of verified ESG objectives.

Finally, technological innovations directly contribute to reducing companies’ environmental impact. The development of clean technologies (carbon capture and storage, green hydrogen, renewable energies, bio-sourced materials, etc.) opens up new perspectives for accelerating the energy transition and promoting circular economic models.

Changing consumer and investor expectations

Consumers and investors are increasingly attentive to companies’ ESG commitments. They favor responsible brands that promote 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 shift reflects a growing demand for sustainable business models aligned with current societal and environmental concerns.

Future ESG Trends

ESG criteria are evolving rapidly and are driven by the growing expectations of investors, consumers, and regulators. Combating climate change remains a priority.

Companies are being urged to strengthen their commitments to carbon neutrality by decarbonizing their operations, adopting renewable energies, and promoting the circular economy. The development of circular business models, promoting reuse and waste reduction, will ultimately become a key requirement, particularly in the industrial and manufacturing sectors.

Pressure on supply chains will intensify. Companies will be required to ensure ethical and sustainable practices throughout their value chain, including ensuring respect for human rights, reducing CO₂ emissions, and ensuring the circularity of raw materials.

Finally, we are witnessing a global harmonization of ESG standards, with the emergence of common and mandatory frameworks, facilitating comparison and limiting the risks of greenwashing. This standardization will allow companies to strengthen their credibility and investors to make more informed decisions.