What is ESG? Definition, Criteria and Key Challenges for Businesses

What does ESG mean ?

More and more investors are using ESG criteria to guide their decisions. In 2023, 78% of private equity professionals stated that ESG performance was aligned with their return objectives, according to a PwC study. ESG has become a strategic tool for building more resilient, forward-looking investment strategies.

ESG is built around three main pillars: Environment, Social, and Governance. These criteria assess how a company addresses major sustainability issues within its operations and development strategy. With the rise of new regulations like the European CSRD (Corporate Sustainability Reporting Directive), integrating ESG is no longer optional it's a strategic necessity.

These indicators matter to investors, consumers, internal stakeholders, and regulators, who now expect companies to transform their business models.

The Three Pillars of ESG

Environmental (E)

This pillar looks at how companies reduce their environmental impact from carbon footprint and waste management to resource usage and pollution control. It also includes biodiversity preservation, the use of renewable energy, and the fight against deforestation.

ClimateSeed a climate action company backed by AXA Investment Managers' impact fund, supports organizations in reducing their carbon footprint and contributing to global carbon neutrality. It offers two core services:

• Measurement and reduction of carbon footprint:  Through its GEMS platform and expert consultants, ClimateSeed simplifies data collection, collaboration, and emissions calculations using recognized standards (GHG Protocol, Carbon Footprint®, ISO 14064). This enables science-based reduction strategies (SBTi).
  
  
• Contribution to high-quality climate projects: ClimateSeed supports organizations in purchasing carbon credits from verified projects (reforestation, renewable energy, etc.), ensuring transparency, traceability, and alignment with the UN Sustainable Development Goals (SDGs).

Social (S)

This aspect evaluates the human impact of a company, both internally and in surrounding communities. It covers employee treatment, working conditions, health and well-being, equal opportunities, diversity and inclusion. It also addresses social dialogue, training, product quality, and transparency toward consumers and stakeholders (NGOs, suppliers, local communities).

Governance (G)

Governance refers to how a company is run. It focuses on transparency, anti-corruption policies, risk management, board composition, executive compensation, and internal controls (e.g. whistleblower programs and audits).

It also examines strategic transparency, lobbying practices, political contributions, and conflict of interest management. Strong governance boosts investor trust and reduces financial, legal, and reputational risks.

How Can Businesses Implement ESG?

1. Assess current impacts
   Start with an ESG assessment covering environmental practices (energy use, emissions, waste), social policies (working conditions, diversity), and governance (ethics, transparency). This helps identify key areas for improvement.
   
   
2. Set measurable goals
   Based on the audit, companies should define clear, measurable ESG goals, tailored to their industry. Examples: cutting CO₂ emissions by 30% by 2030, reaching gender parity in leadership roles, or publishing an annual governance report.
   
   
3. Involve stakeholders
   Employees, suppliers, customers, shareholders, communities and NGOs must be part of the ESG journey. Communication, training and dialogue are key to fostering engagement.
   
   
4. Monitor and adapt actions
   Track ESG KPIs regularly and adjust actions based on results. Sustainability reports, internal audits and certifications (e.g., ISO 14001, B Corp) help support this phase.

Why is ESG Important for Companies?

A 2024 study by Deloitte and the Fletcher School, conducted among over 1,000 investment professionals, revealed that 79% of investors had implemented a sustainable investment policy compared to just 20% five years earlier. This shift is driven by tangible motivations: regulatory requirements (39%), improved financial performance (36%), and stakeholder pressure (34%). ESG integration has thus become a strategic lever for building investor trust, attracting talent, and better anticipating long-term risks. It is also essential for complying with new reporting obligations such as the CSRD in Europe.

Beyond reputation, a rigorous ESG policy is now a true accelerator for accessing funding. Investors favor organizations that can demonstrate a genuine commitment to sustainability and effective long-term risk management. In 2024, for example, the French start-up La Belle Forêt raised €1.8 million from EDF through the sale of carbon credits from forest preservation projects illustrating growing interest in high-impact environmental initiatives. Similarly, companies like L’Oréal regularly recognized for their ESG performance (Platinum EcoVadis rating, SBTi validation, 97% renewable energy use) enjoy strong investor appeal, with a market capitalization of €182.6 billion at the end of 2024.

These examples show that ESG is no longer just a matter of compliance or communication it is a strategic driver of competitiveness and sustainable value creation.

Moreover, ESG enhances a company’s reputation and credibility with all stakeholders. A clear and consistent ESG strategy signals responsibility, transparency, and commitment qualities that are increasingly valued in a rapidly evolving market. ESG also serves as a powerful risk management toolhelping companies anticipate regulatory, climate, social, and governance-related risks. By adopting a proactive approach, organizations reduce their exposure to controversies and strengthen operational resilience.

Finally, meeting growing expectations from consumers, business partners, and employees around sustainability has become a critical challenge. ESG now acts as a key driver of attractiveness, loyalty, and innovation especially in a context where ethical and environmental values increasingly shape purchasing decisions, partnerships, and career choices.

This chart illustrates the sectoral breakdown of companies that have adopted ESG (Environmental, Social, and Governance) practices. It highlights which industries are most engaged in responsible and sustainable initiatives.

What challenges do companies face when it comes to ESG?

Adopting an ESG approach presents a genuine strategic opportunity. However, to be credible, it also requires overcoming several concrete challenges: regulatory demands, significant investments, the risk of greenwashing, and the difficulty of measuring impact. These are all hurdles companies must anticipate to remain both effective and responsible.

1. Navigating a constantly evolving regulatory framework
   ESG regulations especially with the rollout of the CSRD in Europe are raising the bar for corporate transparency. It's no longer enough to simply state commitments; companies must now provide accurate, audited, and comparable non-financial data. Meeting these requirements demands ongoing vigilance and robust internal processes.
   
   
2. Securing the necessary resources
   Implementing a credible ESG strategy often requires substantial investment: carbon audits, employee training, supply chain overhauls, digitized reporting systems... These costs can be a barrier, particularly for mid-sized companies, even though they ultimately boost competitiveness and attractiveness.
   
   
3. Avoiding the greenwashing trap
   Under market and consumer pressure, some companies may be tempted to overstate their ESG claims without enacting meaningful change. This greenwashing risk can lead to lasting reputational damage, legal penalties, and a loss of trust. Ensuring consistency between stated commitments and actual practices is therefore essential.
   
   
4. Measuring and proving real impact
   One of the core challenges of ESG lies in evaluating the effectiveness of actions taken. Unlike financial indicators, environmental and social impacts are more complex to quantify. The absence of a universal standard makes this task even harder though frameworks like the Global Reporting Initiative (GRI) help structure the measurement and comparison of extra-financial performance.

How to Measure ESG Performance ?

To assess ESG performance, companies rely on a combination of indicators, reporting tools, and internationally recognized frameworks.

1. Concrete and measurable ESG indicators

Companies evaluate their ESG performance using a set of qualitative and quantitative metrics tailored to their specific industry and sustainability priorities. Some of the most common indicators include:

• Environmental: CO₂ emissions (Scopes 1, 2, and 3), energy and water consumption, waste recycling rate, biodiversity impact
  
  
• Social:  workplace accident rate, gender parity in leadership roles, employee turnover, training hours, employee satisfaction
  
  
• Governance: board independence, transparency of executive compensation, anti-corruption policies, number of resolved ethical reports

2. Sustainability Reports and External Audits

Publishing a sustainability or ESG report has become a standard practice and often a legal requirement for many European companies. These reports outline an organization’s ESG commitments, the actions taken, and the results achieved. To ensure credibility, many companies engage independent external auditors to verify their disclosures.

More and more organizations are also adopting digital tools such as Datamaran, EcoVadis, Greenly, or ESG-integrated ERP systems to automate data collection, analysis, and consolidation.

3. International ESG Frameworks

To structure their ESG reporting, companies rely on widely recognized international frameworks, including:

• GRI (Global Reporting Initiative): Provides comprehensive standards for disclosing economic, environmental, and social impacts
  
  
• SASB (Sustainability Accounting Standards Board): Offers sector-specific standards focused on financial materiality, helping companies communicate ESG issues relevant to their industry
  
  

• CSRD (Corporate Sustainability Reporting Directive): This EU directive requires many companies to publish standardized sustainability reports based on the European Sustainability Reporting Standards (ESRS), marking a shift toward the full integration of ESG into corporate strategy

• EU Taxonomy: A classification system that defines which economic activities can be considered environmentally sustainable, based on technical screening criteria aligned with the EU’s climate and environmental objectives

• SFDR (Sustainable Finance Disclosure Regulation): This EU regulation requires financial market participants to disclose the ESG impact of their products and investments. Its goal is to improve transparency and direct capital toward sustainable activities

Concrete Examples of ESG in Action ? 

Across the globe, companies are implementing ESG initiatives that align economic performance with social impact and environmental responsibility. These real-world actions serve as inspiration, encouraging others to adopt higher sustainability standards.

1. Carbon Emissions Reduction
   More and more companies are committing to lowering their environmental footprint. For example, Schneider Electric, a global specialist in energy management, has launched an ambitious plan to achieve carbon neutrality across its entire value chain by 2050. The company also offers solutions to help its clients reduce their own emissions, thereby multiplying its positive impact.
   
   
2. Promoting Diversity and Inclusion
   ESG goes beyond environmental concerns. LVMH, a major player in the luxury sector, has rolled out several initiatives to promote diversity within its workforce. This includes signing the Diversity Charter and setting specific targets for gender parity in leadership roles. These efforts enhance the company’s attractiveness and foster a more equitable work environment.
   
   
3. Strengthening Governance
   Governance is a cornerstone of ESG. In 2020, Danone embedded social and environmental objectives into its corporate bylaws by adopting the legal status of a “mission-driven company.” This change requires Danone to align its strategy with long-term responsibility goals, monitored by an independent mission committee.

These examples demonstrate that ESG is far from a passing trend — it is fundamentally transforming corporate practices. By delivering tangible, measurable outcomes, these initiatives create a ripple effect, encouraging other economic actors to embrace sustainable and responsible business models.

Start Your Decarbonization Journey

At ClimateSeed, we support companies at every stage of their climate strategy with concrete, proven solutions:

1. Conduct Your Carbon Footprint Assessment

   Accurately measure your greenhouse gas emissions (Scopes 1, 2, and 3) through our hybrid approach combining technology and expert consulting. Our GEMS platform (GHG Emissions Management Software), together with the guidance of our consultants, helps you identify the main sources of emissions across your operations, products, and value chain. This rigorous diagnostic is the essential first step toward a structured, realistic climate strategy aligned with net-zero trajectories and recognized standards (GHG Protocol, Bilan Carbone®, ISO 14064, SBTi).
   

2. Implement Reduction Actions

   Based on your carbon footprint, our climate consultants work with your teams to co-develop a climate roadmap. This includes phased reduction actions, prioritized by impact and feasibility. Our methodology is grounded in leading frameworks such as SBTi and the GHG Protocol, aiming for measurable and meaningful results.
   
   

3. Go Beyond Your Value Chain with High-Quality Carbon Credits

   Some residual emissions are currently unavoidable. That’s why we help you contribute to global carbon neutrality by supporting carbon reduction or removal projects beyond your value chain (as defined by SBTi). We carefully select our partner projects such as reforestation, regenerative agriculture, and renewable energy based on demonstrated environmental and social impact, in line with the most rigorous international standards (Verra, Gold Standard, etc.).