What Is ESG?
A company may report strong financial results while simultaneously accumulating risks that could make its future operations more difficult. Excessive energy consumption can create cost pressures, drought can disrupt production, and rights violations in the supply chain can lead to legal sanctions and customer loss. Weak oversight mechanisms, meanwhile, can leave even well-designed targets confined to paper.
ESG, which stands for Environmental, Social and Governance, makes these areas measurable components of corporate performance. Current approaches focus less on the length of published reports and more on how data influences strategy, investments and day-to-day decision-making. In this article, we take a comprehensive look at the concept of ESG, its scope and what it means for companies. Enjoy reading!
ESG is an acronym for the English terms Environmental, Social and Governance. It is an assessment framework that examines a company’s relationship with nature and stakeholders such as employees, customers and suppliers, as well as its governance systems.
Investors use these indicators to better understand risks and opportunities that are not directly visible in financial statements. An energy company’s preparedness for climate policies, a bank’s financed emissions or a technology company’s data security practices can affect cash flows and the cost of capital. The UN-supported Principles for Responsible Investment (PRI) defines responsible investment as incorporating ESG issues into investment decisions and investor influence. The IFRS S1 standard likewise focuses on sustainability-related risks and opportunities that could affect a company’s prospects over the short, medium or long term.
ESG integrates sustainability into corporate decision-making processes through risks, impacts, targets and performance indicators. In this way, environmental, social and governance issues become an integral part of a company’s strategy and core operations.
For more detailed information on the green economy, you can read our related article.
I. Environmental Criteria
Environmental criteria examine how a company uses resources and its impact on the environment. Greenhouse gas emissions, energy efficiency, renewable energy use, water consumption, waste, pollution, raw material use, biodiversity and climate resilience are all assessed under this category. Although carbon is an important indicator, the environmental picture is much broader. A business with low direct emissions may still consume large amounts of water in a water-scarce region or depend on raw materials that contribute to nature loss.
II. Social Criteria
Social criteria examine the quality of a company’s relationships with people. Working conditions, occupational health and safety, wage policies, equal opportunities, employee development, human rights, customer safety, data privacy and relations with local communities all fall within this area. Social performance is not limited to charitable activities. Working conditions across the value chain, access to products and the impact of business activities on local communities are also key considerations.
III. Governance Criteria
Governance criteria show how decisions are made, where responsibility lies and how a company oversees its own activities. Board structure, independence, codes of ethics, anti-corruption measures, internal controls, risk management, tax transparency, cybersecurity and executive compensation all fall within this category. Governance determines the capacity to implement environmental and social targets. A target without a designated owner, budget or oversight mechanism has limited power to transform operations.
ESG helps assess a company’s resilience. Energy and water efficiency can help control costs. Climate scenarios reveal the physical risks that facilities and suppliers may face. Human rights assessments can identify legal and operational issues in the value chain at an early stage. Strong governance systems help detect problems before they escalate.
Access to finance is also influenced by this framework. Banks and investors may incorporate companies’ transition plans, emissions, governance quality and social risks into their credit or investment assessments. The data that large companies require from their suppliers also brings small and medium-sized enterprises into the ESG agenda. ESG performance does not guarantee higher profits under all circumstances. Its primary benefit is enabling a company’s capacity to create value to be assessed using a broader set of information.
Read our article “What Is Green Transformation?” to learn more.
A robust strategy cannot be built simply by applying ready-made lists of indicators to a company. The first step is to examine the company’s activities, products and value chain. Engagement with employees, investors, customers, suppliers and local communities helps identify impacts and expectations. Priorities are then determined through a materiality analysis. Targets, timelines, budgets and responsible parties are subsequently defined.
Leaving the process solely to the sustainability team weakens its implementation capacity. Finance, operations, human resources, procurement, legal, risk and senior management should all play a role within the same structure. The board should monitor progress, investment decisions should be aligned with targets, and data should be regularly reviewed. As results change, the strategy should also be updated. This integration strengthens implementation.
Measurement begins with clearly establishing the current state. A company first defines its data boundaries, responsible units and baseline. It then sets short-, medium- and long-term targets. Scope 1, Scope 2 and relevant Scope 3 emissions, energy and water consumption per unit of production, workplace accident frequency, employee turnover rates, pay gaps, ethics reports and board structure are among the indicators that can be used.
We explore this topic in detail in our article “What Are Scope 1, 2 and 3 Emissions?”
Indicators should be selected according to the sector, geography and business model. The connection between data and decision should also be explained. When an emissions target is linked to the investment plan, a human rights commitment to procurement processes, and an occupational safety target to management performance, reporting becomes integrated into corporate operations.
IFRS S1 and IFRS S2 organize disclosures under governance, strategy, risk management, and metrics and targets. The standards also require information to be presented in a connected manner within a company’s general-purpose financial reports and material value-chain risks to be taken into account. This approach is changing the practice of treating sustainability data as a separate area of communication from financial results.
Not every sector assigns the same level of importance to the same issues. For a bank, data security, customer privacy and financed emissions may take priority. For a food company, water, agricultural sourcing and food safety may be more significant. In a tourism business, energy use, working conditions, the local economy and climate risks may need to be considered together.
A materiality analysis determines which issues a company should prioritize. Financial materiality examines the potential effects of sustainability issues on cash flows, access to finance or the cost of capital. Impact materiality, on the other hand, considers the positive or negative impacts a company has on people and the environment. The European Sustainability Reporting Standards combine these two dimensions under the double materiality approach. As a result, reporting is based on a company’s actual impacts and risks rather than on a generic catalogue of topics.
The reporting landscape is moving away from voluntary narratives toward disclosures that are comparable, auditable and useful for decision-making. Türkiye Sustainability Reporting Standards (TSRS) 1 and TSRS 2 apply to entities within the specified scope for reporting periods beginning on or after 1 January 2024. TSRS 1 sets out the general requirements for sustainability related financial disclosures, while TSRS 2 addresses climate-related risks and opportunities. The Public Oversight, Accounting and Auditing Standards Authority continues to publish updates regarding the scope of application and applicable thresholds.
The European Union also adopted a simplified set of ESRS on 3 July 2026. The new framework aims to reduce the data burden, make the standards clearer and simplify the materiality process. At the same time, the core requirement for companies to disclose their impacts on people and the environment, as well as the sustainability risks they face, remains intact. The current direction favors reliable data, clear accountability and strong links to decision-making rather than simply producing longer reports.
You can also read our article “What Is Net Zero?” for more information.
ESG ratings can provide a useful starting point for comparing companies. However, each score is based on different scopes, data sources and weighting methodologies. The OECD’s review of eight major ESG rating products shows significant differences in the metrics and methodologies used. Therefore, a high score alone does not explain the full range of a company’s impacts.
The same caution is necessary when considering the risk of greenwashing. Vague statements, targets pushed far into the future and selective use of data can undermine trust. Transparent methodologies, interim targets, comparisons with previous years and independent assurance can help reduce this risk. The strongest evidence can be seen in the investments a company makes, the procurement policies it changes and the responsibilities it assumes.
The corporate value of ESG does not end with the pages of a report. Its real value emerges when a company identifies a risk earlier, redesigns an investment or takes responsibility for an impact. When environmental and social data are integrated with the governance system, a company can assess its current performance more accurately while also preserving its room to maneuver in the future. A strong ESG approach measures a company’s relationship with the world and transforms that information into a foundation for more consistent decision-making.