What Is ESG in Business And Why Is It Important?

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You can’t build a resilient business if you’re not managing environmental and social risks. And yet, many companies struggle to define ESG in practical, operational terms. It’s a term that gets tossed around in meetings, investor decks, and sustainability reports—but when it’s time to act, most teams are stuck.

Some confuse ESG with CSR. Others think it’s just about emissions or diversity checkboxes. For many, it feels like a reporting obligation rather than a business-critical framework. That confusion leads to missed opportunities, weak compliance, and in some cases, serious financial fallout.

ESG isn’t a trend. It’s a lens through which modern businesses are judged, valued, and regulated. If you don’t understand it, you can’t manage it. And if you don’t manage it, you’re leaving your company exposed.

In this guide, we’ll break down exactly what ESG means in business, why it matters, and how to make it work—without the jargon.

What Does ESG Stand For?

ESG is a framework used to assess how a business manages risks and opportunities related to sustainability, ethics, and internal controls. It’s not just a set of ideals; it’s a measurable, data-driven approach that evaluates how a company operates beyond financial metrics.

Let's understand what does ESG mean in detail:

• Environmental refers to how a company interacts with the natural world. This includes its carbon footprint, energy consumption, waste management, water usage, pollution control, and efforts to adapt to climate change.
• Social focuses on how a company manages relationships with its workforce, suppliers, customers, and the communities it operates in. This covers labor rights, workplace diversity, employee wellbeing, community development, and human rights practices.
• Governance relates to how a business is led and overseen. It includes board structure, executive accountability, internal controls, shareholder rights, ethical conduct, anti-corruption measures, and transparency in decision-making.

Why is ESG important for companies?

Let's go through the importance of ESG for businesses today:

1. Investors Now Evaluate Non-Financial Risk With Financial Consequences

Traditional financial reporting doesn’t capture long-term exposure to climate risk, labor unrest, or governance failures. This is why ESG is important for companies because it fills that gap. Asset managers—especially those managing trillions in passive and active capital—now assess ESG performance before making allocation decisions. 

A company with no climate risk disclosure or a weak governance framework can face investor exit, limited access to green bonds, or blacklisting from ESG funds.

2. ESG Non-Compliance Now Carries Legal and Regulatory Penalties

ESG is also important because what began as voluntary disclosures is rapidly shifting into mandatory regulation.

In the U.S., the SEC’s upcoming climate-related disclosure rule will require detailed reporting on Scope 1, 2—and in some cases Scope 3—emissions, alongside climate-related risk governance.

In the EU, CSRD and the EU Taxonomy Regulation are forcing thousands of companies to provide audited, structured ESG data. In India, SEBI’s BRSR format is already mandatory for the top 1,000 listed companies. Non-compliance can lead to sanctions, legal exposure, reputational damage, and suspension from stock indices.

3. Operational Risks Are Now ESG Risks

What used to be seen as purely operational—supply chain reliability, vendor compliance, facility emissions—is now squarely in the ESG domain. If a supplier violates labor laws or your factory emits beyond regulatory limits, the ESG fallout can cascade into financial risk. 

ESG reporting surfaces these risks early by mapping them to operations, helping businesses avoid downtime, disruptions, or scandals. For instance, companies reliant on global logistics are now expected to conduct human rights due diligence across their Tier 2 and Tier 3 suppliers—because social risks in the supply chain are financial risks at the top.

4. Strategic Customers Require It

Understanding the importance of ESG is now essential for winning strategic contracts. Procurement departments of large enterprises and governments are embedding ESG criteria in supplier onboarding and RFP scoring. If you're a mid-sized business and want to work with a multinational, you’ll often be required to submit ESG disclosures—including carbon footprint, diversity data, and code of ethics documentation.

What Is ESG Compliance?

ESG compliance means meeting specific legal, regulatory, and industry requirements related to environmental, social, and governance practices. It involves structured disclosures, accurate data tracking, and proof that your business operates within mandated ESG boundaries. 

Unlike ESG strategy, which is self-directed and aspirational, ESG compliance is rule-based and enforced. One is about improvement; the other is about meeting minimum required standards. ESG compliance includes the following:

1. Regulatory ESG Reporting

Adhering to jurisdiction-specific rules such as CSRD (EU), SEC climate disclosures (US), or BRSR (India). For example, CSRD will require over 50,000 EU and non-EU companies to submit audited ESG disclosures beginning FY 2024–25, while India’s BRSR is already mandatory for the top 1,000 listed entities.

2. Standards Alignment

Structuring disclosures to fit global ESG frameworks like GRI, SASB, TCFD, or CDP. Investors and regulators use these frameworks to assess comparability and completeness; GRI is used by 78% of the world’s largest 250 companies for sustainability reporting.

3. Verified Emissions Accounting

Calculating Scope 1, 2, and where relevant, Scope 3 emissions using accepted protocols like the GHG Protocol. Scope 3 often accounts for more than 70% of a company’s total emissions, and under CSRD, disclosure is mandatory if material. This illustrates what ESG sustainability looks like when quantified across an entire value chain.

4. Documented Policies

Having written and implemented policies on environmental management, anti-corruption, labor standards, DEI, and board governance—ready for audit or external review. These must go beyond statements and demonstrate application through procedures, training records, and internal audits.

5. Audit-Ready Data

Maintaining traceable, version-controlled ESG data with defined calculation logic. Under CSRD, limited assurance by independent auditors is mandatory, so companies must ensure ESG data can be verified like financial data.

6. Assigned Oversight

Clear ESG accountability at the leadership level—typically the board or a sustainability officer. Regulations such as CSRD require formal ESG oversight structures and may hold directors personally accountable for sustainability risks.

7. Grievance and Ethics Mechanisms

Systems for whistleblowing, ethics reporting, and human rights complaints—especially for businesses with extended supply chains. The upcoming EU Corporate Sustainability Due Diligence Directive (CSDDD) will require companies to prove that these mechanisms are not just present, but functional and accessible.

What Is a Good ESG Score

A good ESG score generally signals that a company is managing its environmental, social, and governance risks effectively and transparently. On most rating models that use a 0–100 scale, a score above 70 is considered good, while anything below 50 indicates poor performance or limited disclosure. 

Different ESG rating providers apply different methodologies, which means the meaning of a “good” score depends on who’s doing the rating. For instance:

• MSCI uses a letter-based scale, where AAA and AA indicate ESG leaders, and B, CCC, or below reflect lagging performance.
• Sustainalytics provides an ESG risk score, where 0–10 is low risk, 10–20 is medium, and scores above 30 indicate high or severe risk.
• Refinitiv and S&P Global use 0–100 numeric scales, with good scores typically starting around 70.

While the scales differ, the underlying expectations are similar: strong governance, robust environmental management, social responsibility, and public transparency.

Getting Started With ESG Reporting For Your Business

Now that you have a detailed understanding of what ESG is and why it is important for businesses, the next step involves measuring, reporting, and managing your ESG performance with intent. This includes tracking your emissions, disclosing material data, aligning with standards, and continually monitoring your progress across environmental, social, and governance parameters.

However, building a complete ESG reporting system manually can be time-consuming, error-prone, and resource-intensive—especially when dealing with complex supply chains, evolving regulations, and investor scrutiny. 

This is where AI-powered ESG reporting platforms like Breathe ESG come handy.

Breathe ESG simplifies the ESG journey by automating data collection, emissions accounting (Scope 1, 2, and 3), standards-based reporting (GRI, BRSR, CSRD, TCFD), and real-time performance dashboards. With built-in analytics, assurance readiness, and industry-aligned frameworks, Breathe helps businesses not only stay compliant but improve their ESG scores with clarity and speed. 

Book a free demo today and streamline your ESG journey instantly.

FAQs

1. What is an example of ESG?

A company reducing carbon emissions, ensuring board diversity, and upholding fair labor practices is a strong ESG example. These reflect what ESG means in business—managing environmental impact, social responsibility, and governance transparency to build sustainable value.

2. Why is ESG so important for companies?

Why ESG is important for companies lies in its ability to reduce risk, attract investors, and meet regulatory demands. It influences brand trust, operational resilience, and long-term growth. Today, ESG is essential—not optional—for businesses across industries and geographies.

3. What are the three pillars of ESG?

The three pillars of what ESG stands for are: Environmental (climate, emissions, energy use), Social (labor, diversity, community), and Governance (leadership, ethics, transparency). Together, they define what ESG strategy entails for responsible and sustainable corporate behavior.

4. What does greenwashing mean?

Greenwashing is when a company exaggerates or falsifies its ESG claims to appear sustainable without actual impact. It undermines ESG values, misleads stakeholders, and weakens trust—highlighting the need for verified data and genuine ESG reporting aligned with global standards.

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