Environmental, social, and governance (ESG) are tools and criteria that help companies set non-financial goals, measure performance, and make changes towards greater sustainable businesses practice. These measures are also intended to help increase transparency into a company's practices to attract consumers and investors. ESG is considered to be a part of a sustainable business model and has been suggested to have long-term benefits for a company's competitiveness, resilience, capability for scaling, resistance to commoditization, and sustainability, and to help create value for investors and stakeholders.
The ESG framework has been an evolution from Corporate Social Responsibility (CSR) constructs, which have since fallen into disuse. The change from the CSR framework to the ESG framework has been considered a positive change for businesses, not only for having ambitions beyond the bottom line for shareholder value and rewards, but also for developing a framework for a company to engage with a community, to demonstrate a willingness and a capability for developing sustainability, and to offer a way for a company to be held accountable.
Environmental, social, and governance framework
Most companies develop the goals and ambitions based on internal concerns or based on the demands faced by the company from investors, regulators, community stakeholders, or the boards of directors. However, validating whether a company has actually followed the ESG framework and related goals is difficult. As well, understanding if the company has considered the possible consequences, opportunities, benefits, or potential risks the policies have on the business and environment is not well understood. Validating any of these measures is difficult, and because a lot of the goals and ambitions of a company are subjective to the company, measuring them brings increased challenges.
There are companies offering ESG validations to help companies, investors, and regulatory authorities to understand whether a company is meeting the company's proposed goals, and further, to validate whether the goals the company has proposed make sense in the framework or for the industry sector the company partakes in. However, there remains no standardized framework or measurement process or approach to validate the ESG criteria. As well, some concerns exist because of the lack of an objective framework, and a lot of the validation processes tend to reflect the concerns or campaigns of the organization performing the validation.
