INTRODUCTION
In recent times, there has been an increased emphasis on the inclusion of sustainability by business entities, and organisations globally.1 This evolution has made ESG both topical and essential for businesses all over the world.
ESG is successively influencing investment decisions as investors desire to align their portfolios with their values and manage potential risks.2 Furthermore, companies that prioritise ESG principles are often seen as responsible and sustainable, enhancing their brand reputation and attracting socially responsible customers.
WHAT IS ESG?
The Initialism ESG is based on three fundamental elements/factors/pillars. E stands for "Environmental", S for "Social" and G for "Governance". ESG refers to the factors, principles and standards that assess an organisation's environmental, social and governance activities, and which are used by investors to evaluate and decide their investment choices. Also, ESG is a structure for evaluating the stewardship and ethical impact of an investment.
ESG factors influencing investment choices
The 'E' factor assesses the company's behaviour towards the environment. In particular, environmental factors refer to the need to promote production process that require less energy and have a lower impact on the environment.3 Environmental criteria focus on the organisation's carbon footprint, resource usage, waste management, and pollution control efforts.
The "S" factor examines the social impact of the company and its relationship with the territory, employees, suppliers, clients, community wellbeing and respect for human rights. It focuses on the working conditions of employees, employees' benefits, non-discrimination, interaction with local communities, clients' feedback and complaints etc.
The "G" factor/pillar a concerns corporate management inspired by good practices and ethical principles. Specifically, corporate governance factors include diversity policies in the composition of companies' boards of directors, the presence of independent directors, executive remuneration arrangements and respect for minorities. It includes board independence, shareholder rights, diversity, and information disclosure.4
WHY IS ESG IMPORTANT?
ESG is important because it helps identify and manage risks, improve social responsibility, enhance long-term sustainability, meet stakeholder expectations, guide and comply with regulations, and improve access to capital. It promotes sustainable practices, responsible decision-making, and long-term value creation while reducing risks and improving reputation.
CONCLUSION
Environmental, Social and Governance (ESG) factors have become a vital aspect of responsible business practices and investing. By evaluating a company's ESG performance, investors can gain insight into its sustainability, standards, and potential risks. ESG also improves reputation, enhances long-term value creation and supports better decision-making.
As the world continues to face environmental, social and governance challenges, ESG will remain a crucial framework for promoting responsible business practices and sustainable investing.
Footnotes
1. Minutiello, V., García-Sánchez, I.-M., & Aibar-Guzmán, B. (2024). The Latest Developments in Research on Sustainability and the Sustainable Development Goals in the Areas of Business, Management and Accounting. Administrative Sciences, 14(10), 254. https://doi.org/10.3390/admsci14100254
2. Mathew Khan et Al (2024) "A Behavioural Insights Analysis of the Effects of Environmental, Social, and Governance Factor (ESG) Disclosure and Advertising by Investment Funds on Retail Investors" accessed 19th March, 2025.
3. Radzi, Hirdayu. (2023). An Overview Of Environmental, Social And Governance (Esg) And Company Performance. 1111-1122. 10.15405/epsbs.2023.11.90.
4. Luk Luk Fuadah, Mukhtarudin , Isni Andrianaa, Anton Arisman (2023), 'Environmental, Social and Governance" Integrated Journal of Business and Economics. accessed 19th March 2025 https://www.researchgate.net/publication/372117225_Environmental_Social_and_Governance_ESG/fulltext/64a8ab218de7ed28ba825ed1/Environmental-Social-and-Governance-ESG.pdf
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