What are ESG Criteria? An Overview of Objectives and Standards

In addition to external pressure from society, customers, suppliers and regulatory requirements, there is a growing internal drive in many companies to engage more intensively with ESG issues. More and more companies are recognizing that sustainability is not just an obligation, but also an opportunity to secure their long-term competitiveness. Some companies have been producing comprehensive sustainability reports for years, while others have firmly integrated ESG goals into their corporate strategy in order to ensure sustainable value creation.

But what is ESG all about? To give you a better understanding, we have summarized all the important basic information about ESG for you in this blog article.

What is ESG, and why is it relevant?

The term or abbreviation ESG stands for Environmental, Social and Governance. Although these factors have been critical in investment discussions since the 1960s, the United Nations only officially launched the ESG concept in 2006. This provided a certain measurability of a company's sustainability performance.

In general, ESG criteria provide a framework for assessing the sustainability performance and social responsibility of companies. In the financial sector, they are used to ensuring investments in sustainable investments. ESG criteria are indispensable in modern corporate governance, as they not only meet the expectations of stakeholders (such as investors and customers), but also minimize economic risks and promote social responsibility. Nowadays, they have a long-term influence on the success and reputation of a company. For greater transparency and comparability, ESG rating providers such as EcoVadis or CDP rate companies based on their ESG criteria and offer economic players valuable guidance — for example when selecting business partners and suppliers. At the same time, they support companies, suppliers as well as cities and governments in transparently disclosing their ESG data and promoting sustainable practices.

The three Pillars of ESG: Environmental, Social, Governance — briefly explained

Environmental

The first ESG criterion deals with the environmental aspects of a company. It includes all key figures and documents that show how environmentally friendly or environmentally damaging a company's actions are.

Interested stakeholders should be able to recognize the extent to which the company pollutes the environment, emits greenhouse gases, consumes resources and also what the company is doing to improve and protect the environment (resource conservation, efficient energy use, etc.).

In recent years, climate risks have also become more significant in Germany, as the effects of the climate crisis are becoming more apparent not only abroad, but also here. As this is also an economic threat, environmental protection measures are becoming increasingly important (McKinsey study, 2020: Climate Risk and Response).

The environmental criterion deals with, among other things:

• Strategies for adapting to climate change: Mitigating the effects of climate change and adapting to changing climatic conditions
• Energy consumption and energy mix: Analysis and optimization of energy consumption, transition to a sustainable energy mix (high proportion of renewable energies)
• Scope 1, 2 and 3 emissions and projects to reduce greenhouse gases: Recording and reduction of direct, indirect and other emissions along the entire value chain, as well as initiatives to reduce CO₂ emissions
• Information on the amount of and measures against environmental pollution: Disclosure of environmental pollution, concrete measures to prevent/reduce it
• Measures to protect water and marine resources: Initiatives for the protection and sustainable use of water resources and the prevention of marine pollution
• Sustainable strategies for the protection and promotion of biodiversity: Development of projects to conserve and promote biodiversity, in particular with regard to endangered species and natural habitats
• General use of resources and promotion of the circular economy: Efficient use of natural resources, promotion of recycling and reduction of waste

Companies can use various certificates, such as the environmental management systems ISO 14.001 or EMAS, as well as ESG ratings and transparent ESG reporting to demonstrate how environmentally friendly they are. Different priorities are set here:

• CDP focuses on the environment. The rating covers key figures on climate change, deforestation, water security, biodiversity and plastics.
• EcoVadis deals with a total of 21 sustainability indicators, 9 of which are in the environmental area (details on the EcoVadis rating).
• The EU law CSRD contains 12 ESRS standards, 5 of which are environmental topics (ESRS E1 to ESRS E5).

Social

The second ESG criterion deals with the social aspects of a company. It comprises all measures and guidelines that show how a company fulfills its responsibility towards employees, customers, suppliers, and society.

Interested stakeholders should be able to recognize the extent to which the company offers fair working conditions, promotes diversity and inclusion, respects human rights and contributes to the common good. In recent years, the importance of social responsibility has increased significantly, as companies are increasingly being held accountable for the social impact of their business practices. Social criteria are therefore not only ethically relevant, but also influence a company's reputation and economic success.

The social criterion deals with, among other things:

• Compliance with labor and human rights: Ensuring fair treatment, prohibition of forced and child labor, promotion of non-discrimination
• Working conditions and health protection: Provision of safe and healthy workplaces, measures for occupational safety and ergonomic design
• Diversity and inclusion: Promotion of diverse teams, gender equality, equal opportunities, integration of different cultures and perspectives
• Training and development: offers for professional development, training and further education for employees
• Social commitment: Participation in social projects, corporate social responsibility (CSR), support for local communities

The social criterion is not only concerned with the company's workforce, but also with workers along the company's value chain and with the impact that a company has on the population (affected communities as well as product end users).

Companies can use various standards, ESG ratings and certificates to demonstrate how socially responsible they are. These include, among others:

• OECD Guidelines for Multinational Enterprises: Recommendations for responsible business conduct in areas such as human rights, labor standards and the environment.
• ILO Core Labor Standards: International labor standards that establish fundamental principles such as freedom of association, elimination of forced labor and prohibition of discrimination.
• UN Global Compact: United Nations initiative that calls on companies to comply with ten principles in the areas of human rights, labor, environment and anti-corruption.
• ISO 26000: Guideline on the social responsibility of organizations, which describes principles and practices for sustainable action.
• EcoVadis: Seven of 21 sustainability indicators deal with labor and human rights.
• CSRD: Of the 12 ESRS standards, four include social issues.

Governance

The third ESG criterion is dedicated to governance, i.e. responsible corporate management. It encompasses all structures, processes and guidelines that ensure that a company acts in a legally compliant, ethically correct and transparent manner.

Interested stakeholders should be able to recognize how well a company is organized, what values and principles it represents, and how it ensures that these are adhered to. Governance plays a central role, as it forms the basis for sustainable business practices and compliance with regulatory requirements.

The governance criterion deals with, among other things:

• Ethics policies and codes: Clear guidelines to combat corruption, bribery and conflicts of interest
• Compliance and adherence to the law: Compliance with legal regulations, avoidance of legal violations
• Transparency and open communication: Publication of information on corporate decisions and risks
• Independent supervisory bodies: Diverse and independent composition of supervisory boards and other supervisory bodies
• Competition law and fairness: Ensuring a fair competitive environment and avoiding market manipulation
• Tax compliance: Legally compliant tax policy and transparent reporting

Recognized standards for governance are:

• German Corporate Governance Code (DCGK): Guidelines for good and transparent corporate governance in Germany.
• UN Global Compact: Promotes compliance with human rights, labor standards and anti-corruption.
• ISO 37000: Standard for the principles and practices of effective corporate governance.
• OECD Principles of Corporate Governance: International standards to strengthen transparency and responsibility.
• German Sustainability Code (DNK): Framework for transparent sustainability reporting.
• EcoVadis: The ethics section with 3 sustainability indicators deals with corporate governance.
• CSRD: There is an ESRS governance standard that takes a closer look at how administrative, management and supervisory functions shape a company's culture.

ESG Standards and Criteria: Frameworks for Sustainable Corporate Governance

In principle, ESG criteria offer a flexible framework for assessing a company's sustainability performance. Depending on the interests of the stakeholders, the ESG criteria can be designed to focus on different aspects. This versatility has led to the development of numerous ESG ratings and standards that help companies to make sustainability measurable, comparable and transparent.

The ESG rating provider CDP, for example, focuses on environmental issues such as climate change, forests, and water security (expansion to include social and governance aspects is planned). In comparison, the ESG rating from EcoVadis covers various criteria from the areas of the environment, labor and human rights, ethics and sustainable procurement.

Global frameworks such as the Global Reporting Initiative (GRI) or the standards of the Sustainability Accounting Standards Board (SASB) provide structured guidelines for systematically recording and disclosing ESG data. This is supplemented by the ESRS of the CSRD, which ensure uniform and detailed ESG reporting.

These frameworks and assessment mechanisms provide companies with clear guidance on how they can strategically integrate ESG aspects into their value chain. Transparency and uniform standards not only create benefits for companies themselves, but also promote sustainable development at a global level.

ESG Goals: How Companies promote Sustainable Development

A decisive milestone for the integration of ESG goals for a sustainable economy is the "2030 Agenda for Sustainable Development" adopted by all member states of the United Nations (UN) in 2015. This contains 17 Sustainable Development Goals (SDGs) that focus on environmental, social and economic aspects. The agenda calls on companies worldwide to align their strategies and business practices with these goals. The SDGs include measures to combat climate change, promote gender equality, fight poverty and ensure sustainable consumption and production.

At this point at the latest, the importance of ESG aspects for the entire value creation process becomes clear. Companies that successfully integrate ESG goals into their strategy not only strengthen their social reputation, but also create sustainable economic success. They minimize risks, increase their attractiveness for investors and secure the long-term loyalty of customers and talent.

In order to effectively anchor ESG criteria in the corporate strategy, a clear link between sustainability goals and operational business activities is required. Companies should:

• Define sustainability goals: Based on the SDGs and company-specific challenges.
• Establish key figures and reporting mechanisms: To make progress measurable and transparent.
• Define responsibilities: With sustainability officers or Chief Sustainability Officers (CSOs) who strategically drive ESG issues forward.
• Invest in sustainable technologies and processes: To reduce emissions and use resources more efficiently.

By combining external responsibility and internal conviction, ESG is becoming a key driver of innovation and sustainable growth. Companies that anticipate this development at an early stage position themselves as pioneers of a sustainable economy.

Conclusion: Why ESG is Indispensable for Companies

ESG criteria are far more than just a buzzword. They offer companies the opportunity to take responsibility and ensure long-term success at the same time. In a world where customers and investors are increasingly conscious of their actions, companies with a strong ESG strategy have a clear advantage.

Companies that integrate ESG into their processes not only benefit from a better market position, but also from meeting regulatory requirements such as the CSRD. ESG ratings such as EcoVadis help to make this development measurable and transparent.