What is ESG? A Guide for Companies

Introduction to ESG

The idea behind ESG is that companies should not only be measured by their financial results, but also by their impact on the climate, how they treat people, and how they are governed. That’s why ESG factors have become an important part of any ESG framework used by investors, asset managers, customers, employees, and regulators. Clear ESG criteria and reporting help encourage companies to act responsibly and contribute to a sustainable future for future generations.

Why is ESG Important for Companies?

The demand for sustainable development is growing across society. Companies that ignore ESG issues risk losing business, facing higher costs, and damaging their reputation. At the same time, actively working with environmental factors and social aspects can help businesses improve both risk management and profitability. ESG has therefore become increasingly important in business management and reporting, especially in the EU [1].

For many investors and asset managers, ESG is also part of their investment approach – sometimes referred to as ESG strategy or ESG investments (often abbreviated as “msg investments” or “msg strategy” in certain market contexts).

ESG as a Competitive Advantage

For many companies, ESG has become a way to stand out in the market. Consumers increasingly focus on sustainable consumption, and investors demand reliable sustainability reports that show companies are working with a long-term perspective [9]. Companies with strong governance performance and ESG goals can, in some cases, attract capital more easily – for example, through sustainability-linked loans – and may benefit from stronger brands. However, research results vary between markets and industries [10][11].

Environment – The E in ESG

The first dimension is E (Environmental). This covers a company’s impact on climate, natural resources, and ecosystems. It includes direct and indirect greenhouse gas emissions, pollution, wate, resource use, circular economy, waste management, and biodiversity [3]. By focusing on environmental impacts and climate change, companies can reduce risks and find new opportunities in a more sustainable economy.

Climate Impact and Emissions

Many companies are now actively measuring and reporting their greenhouse gas emissions. ESG data on climate impact is a key part of demonstrating transparency and meeting the demands of customers and regulators. Setting science-based targets, tracking indirect greenhouse gas emissions, and reporting progress openly strengthen credibility and contribute to sustainable development [7].

Resource Efficiency and Circularity

Beyond emissions, resource efficiency is crucial. Companies can reduce costs and improve environmental performance by using resources more wisely. Circular business models and smart resource use help create a more sustainable operation. Examples include large players in the fashion industry focusing on recycled materials, as well as smaller businesses that revamp old technology to give it a second life [3].

Social Responsibility – The S in ESG

The second dimension is S (Social), which refers to a company’s responsibility for people and society. This includes working conditions of own workers and in the value chain, health and safety, diversity, human rights in supply chains, workplace culture, and relationships with affected communities, consumers and end-users [7]. Strong social sustainability contributes to long-term trust and value creation.

Working Conditions and Human Rights

Fair treatment at work is a given part of ESG. It’s about secure jobs, fair wages, and respect for basic rights. When companies take responsibility for how their products are made – even in their supply chains – the risk of exploitation and injustice decreases. Openness about conditions and clear requirements for partners make a big difference in creating more sustainable development [7].

Diversity and Inclusion

Diversity means that people with different backgrounds, experiences, and perspectives are represented. Inclusion means that everyone truly feels welcome and able to contribute. When companies actively work with equality and inclusion, the workplace culture becomes more creative and enjoyable. Research also shows that diverse teams often make better decisions and perform stronger – something that benefits both people and the business.

Relationships with Local Communities

Companies always affect the communities they operate in, for better or worse. By engaging locally, they can give back—for example, by creating jobs, supporting local associations, or collaborating with schools. When businesses contribute to positive local change, they build trust and become a natural part of community development, rather than being seen as outsiders [7].

Governance – The G in ESG

The third part of ESG is G (Governance), which refers to corporate governance and business conduct. At its core, it’s about how a company makes decisions and takes responsibility for its actions. This includes being transparent with information, having clear rules against fraud and corruption, and ensuring that leadership takes sustainability seriously. Without good governance, the other parts of ESG – environment and social responsibility – risk being just words on paper [7].

Responsible Leadership

Good leadership is the key to making ESG work in practice. When managers and boards show that sustainability is important in everyday operations, it sets the tone for the entire organization. Responsible leadership isn’t just about branding – it’s about making smart decisions that make a real difference for both the company and society in the long run [7].

Anti-Corruption and Transparency

Anti-corruption is one of the most critical governance issues. Weaknesses can quickly destroy trust and relationships. Companies that build transparency into governance show responsibility and create confidence among investors and society at large [7].

Regulations Driving ESG

Much of the development around ESG is linked to new rules and guidelines. In the EU, stricter requirements for sustainability reporting have been introduced, including the CSRD and the EU taxonomy. The upcoming Corporate Sustainability Due Diligence Directive (CSDDD) will further require companies to identify, prevent, and mitigate adverse impacts on human rights and the environment across their value chains. Globally, frameworks like GRI and SASB also help companies measure and present their work in a more comparable way [1][3][7][8]. These frameworks help organizations integrate ESG factors into decision-making and manage sustainability issues in a structured way.

EU Sustainability Reporting

With the Corporate Sustainability Reporting Directive (CSRD), EU sustainability reporting gains new weight [1].

The largest listed companies already covered by NFRD (+500 employees) reported under the directive following ESRS during 2025. Due to the Omnibus and the resulting negotiations within the EU, all other companies that may be required to report will do so after 2028.  

For smaller companies, the EU has introduced a simplified voluntary standard called VSME. It is designed for SMEs that don’t have the same resources as large corporations but still need to meet growing demands from banks, suppliers, and customers, and that want to improve their own sustainability work and contribute to a more sustainable and inclusive economy  [5][6]. This way, even smaller businesses can increase transparency, improve their structures, and strengthen their competitiveness in an economy where sustainability matters more than ever.

EU Taxonomy for Sustainable Investments

The taxonomy is essentially a guide to what can be classified as environmentally sustainable investment. It influences where capital flows and helps investors make better decisions. Companies that adapt to the taxonomy strengthen their position in a more sustainable economy [3][4].

Investors and Risk Management

Investors today look not only at financial results but also at how a company manages sustainability. ESG data helps them see both risks and opportunities – for example, whether a business is vulnerable to climate change or has issues with working conditions in its supply chain. Large players, such as members of PRI (Principles for Responsible Investment), are placing increasing emphasis on long-term responsible companies [9]. For asset managers, integrating ESG criteria into portfolio selection is now a mainstream practice.

For companies, ESG is also a tool to spot weaknesses before they become problems. Identifying environmental, people, and governance risks early helps build more stable, resilient operations. In this way, ESG can act as a kind of insurance against future crises and sustainability issues [9].

Reporting and Communication

An important part of ESG is showing what you actually do. When companies openly share their results – both successes and areas that need improvement – they build trust. Honest communication makes customers, investors, and others more likely to believe that the work is genuine. Those who exaggerate or greenwash risk quickly losing credibility. In short: better to be transparent and show progress than to pretend to be perfect [15].

Implementation and Digitalization

Many companies face major hurdles: lack of resources, complex supply chains, and difficulties measuring impact. Collecting reliable ESG data is one of the biggest challenges [12]. At the same time, new standards and digital tools are available to help businesses move forward, like the GoClimate’s platform.

To succeed with ESG, a clear plan is needed. Companies must gather relevant ESG data, use established frameworks to avoid duplicate work, and, when possible, set goals. This helps improve both internal processes and external reporting [12].

Digital tools also make ESG data management easier. Systems for tracking supply chains, measuring emissions, and automating sustainability reports make it simpler to improve over time [13].

ESG as a Strategy for Long-Term Success

Looking ahead, the demands on companies will remain high and continue to develop. companies that improve their ESG practices today gain a head start and strengthen their market position.

At its core, ESG is common sense: taking care of the environment, treating people fairly, and governing the company responsibly. By working on these issues, businesses can reduce risks, build trust, and create more sustainable operations over time. Honest ESG data, openness, and strong leadership are the keys to winning customer trust, contributing to social sustainability, and succeeding in the long run [15].

Learn how GoClimate can help you with your ESG strategy and reporting.