Environmental, social and governance (ESG) FAQs

Environmental, social and governance (ESG) refers to a set of factors used to assess how responsibly and sustainably an organisation operates.

• Environmental covers issues like energy use, carbon emissions, waste, and resource management.
• Social focuses on people-related matters such as employee wellbeing, diversity, community impact, and human rights.
• Governance relates to how the organisation is run, including leadership, ethics, risk management, and transparency.

ESG helps organisations and investors understand long-term risks, opportunities, and sustainability performance.

The core principles of ESG focus on operating responsibly, ethically, and sustainably across three key areas:

• Environmental: Minimising environmental impact by reducing emissions, improving resource efficiency, and managing waste responsibly.
• Social: Treating people fairly and ensuring safe, inclusive, and ethical practices for employees, customers, and communities.
• Governance: Maintaining strong leadership, transparent reporting, accountability, and robust systems to manage risk and uphold ethical standards.

Together, these principles guide organisations in balancing financial performance with long-term sustainability and social responsibility.

Examples of environmental, social and governance (ESG) factors include:

Environmental:

• Reducing carbon emissions
• Improving energy efficiency
• Managing waste and recycling
• Protecting biodiversity and natural resources

Social:

• Ensuring employee health, safety, and wellbeing
• Promoting diversity, equality, and inclusion
• Supporting fair labour practices in the supply chain
• Contributing to local communities

Governance:

• Transparent reporting and ethical decision-making
• Strong leadership and board accountability
• Anti-bribery and corruption policies
• Effective risk management and compliance systems

These examples show how ESG covers a wide range of practices that support responsible and sustainable business.

ESG and CSR are related but not the same.

Corporate Social Responsibility (CSR) focuses on how an organisation behaves responsibly and “gives back” to society. It often includes voluntary initiatives such as charitable donations, community projects, employee volunteering, or ethical policies. CSR is usually values-led and less formally measured.

Environmental, Social, and Governance (ESG) focuses on how an organisation measures, manages, and reports its impact and risks across environmental, social, and governance factors. ESG is data-driven, tied to performance, risk management, and increasingly required by investors, regulators, and supply chains.

The social (S) part of ESG is measured using people-focused metrics and policies, mainly across four areas:

• Workforce: pay gaps, diversity, turnover, health and safety, training
• Labour & human rights: modern slavery checks, fair working conditions, supply-chain due diligence
• Customers: data protection, complaints, product safety
• Community: local employment, social investment, community impact

Evidence comes from HR and H&S data, audits, surveys, and public reporting.

A materiality assessment in ESG is a structured process used by an organisation to identify which environmental, social, and governance issues matter most to its business and stakeholders.

It helps organisations focus on the ESG factors that have the greatest impact on business performance, risk, and reputation, rather than trying to address everything. This usually involves analysing internal data, consulting stakeholders (such as employees, customers, suppliers, and investors), and assessing regulatory, financial, and operational risks.

The outcome is a prioritised list of material ESG issues that informs strategy, targets, reporting, and investment decisions, ensuring ESG efforts are relevant, proportionate, and aligned to the organisation’s activities and industry.

Scope 1, Scope 2, and Scope 3 emissions are categories used to measure an organisation’s greenhouse gas emissions, covering both direct and indirect impacts.

Scope 1 emissions are direct emissions from sources the organisation owns or controls, such as fuel burned in company vehicles, boilers, or on-site machinery.

Scope 2 emissions are indirect emissions from energy use, mainly electricity, heating, cooling, or steam purchased and used by the organisation.

Scope 3 emissions are all other indirect emissions across the organisation’s value chain. These include emissions from suppliers, business travel, employee commuting, waste disposal, product transport, and the use or disposal of products sold.

Scope 3 is often the largest and hardest to measure but is increasingly important for ESG reporting and supply chain accountability.

Carbon neutral means emissions are balanced to zero, usually by offsetting what you produce. You can still emit significant CO₂, as long as it’s cancelled out elsewhere.

Net zero means emissions are reduced as far as possible first (typically 90–95%), with offsets used only for what can’t be eliminated. It covers all greenhouse gases, including CO₂.

The most common ESG frameworks provide guidance on what to measure, how to report, and how to compare performance across organisations. The key ones include:

• UN Sustainable Development Goals (SDGs) – A set of 17 global goals covering environmental, social, and economic priorities. Often used to align ESG activities with broader societal impact rather than detailed reporting.
• Global Reporting Initiative (GRI) – One of the most widely used frameworks for ESG reporting. It focuses on transparency and impact across environmental, social, and governance topics.
• International Sustainability Standards Board (ISSB) – Develops global sustainability disclosure standards, including climate-related financial disclosures, aimed at consistency for investors and regulators.

Organisations often use more than one framework, depending on their size, sector, regulatory requirements, and stakeholder expectations.

ESG reporting is only mandatory for certain large or listed companies, as required by existing legislation:

• Companies Act 2006 – large and quoted companies must report on environmental, employee, and social matters in their strategic report.
• Climate-related Financial Disclosure Regulations 2022 – companies and LLPs with over 500 employees and £500m+ turnover, plus traded, banking, and insurance companies, must provide TCFD-aligned climate disclosures.
• SECR Regulations 2018 – large companies and LLPs must report energy use, carbon emissions, and efficiency measures.

Smaller organisations are not generally required to produce ESG reports, although future UK Sustainability Reporting Standards may expand these obligations.

Even if you’re a small business, you may be asked for ESG data because larger organisations you work with are required to report on it.

Many companies must report on their supply chain impacts, including Scope 3 emissions, which cover the environmental and social footprint of their suppliers. To meet their legal, investor, and regulatory obligations, they need ESG information from businesses they buy from.

Providing ESG data has become part of winning tenders, maintaining contracts, accessing finance, and securing insurance. It helps demonstrate that your business manages risks responsibly, complies with standards, and aligns with customer expectations, even where ESG reporting is not legally mandatory for you.

Greenwashing is when an organisation misleads or exaggerates how environmentally responsible it is.

Avoid greenwashing by:

• Making specific, evidence-based claims
• Reducing emissions first, not just offsetting
• Using recognised standards
• Being transparent about progress and limits.

The main problems with ESG are that definitions and standards vary widely, making it difficult to measure organisations consistently, and reporting can become complex, time-consuming, or focused more on compliance than meaningful action.

ESG ratings can also be unreliable, as different providers use different criteria, leading to inconsistent scores.

Some organisations may engage in “greenwashing”, overstating their environmental or social performance. These issues make it harder for stakeholders to compare companies and assess real impact.

A high ESG score is generally linked to lower risk, stronger resilience, and better long-term performance because organisations are less exposed to regulatory penalties, reputational damage, and operational disruption. It can also improve access to capital, as investors increasingly favour businesses with credible ESG practices.

However, strong ESG performance does not automatically increase short-term profits, and the financial impact varies by sector and how genuinely ESG is embedded in the business.