ESG: what it is and what it means

In recent years, one acronym has taken up increasing space in corporate balance sheets, investor portfolios, and sustainability debates: ESG. Behind these three letters lies an approach that is redefining the way companies operate and are evaluated, shifting attention beyond purely financial data towards a broader vision of value creation.

Understanding what ESG means, what the ESG criteria are and why they have become so relevant is today essential for anyone wishing to interpret the direction that markets, regulations, and corporate strategies are taking. This is not a passing trend: it is a structural transformation that affects companies of every sector and size, including those that manage critical infrastructure such as energy networks.

ESG: definition and key criteria

The ESG acronym stands for Environmental, Social, and Governance: three areas of assessment that together describe how a company manages its impact on the world and how it is organised internally. The concept originated in the world of finance – it was officially introduced in a 2004 United Nations report, “Who Cares Wins” – but over time it has gone well beyond the boundaries of ESG investing to become a reference framework for corporate strategy and reporting as a whole.

ESG factors do not replace traditional financial evaluation, but complement it: a company with solid economic fundamentals but opaque governance or a high environmental impact is now considered riskier – and less attractive – than one that performs well across all three dimensions. In summary, the main metrics monitored for each area are:

• Environmental: greenhouse gas emissions (Scope 1, 2 and 3), energy consumption and share from renewable sources, water resource management, waste production and treatment, biodiversity impact.
• Social: working conditions and occupational health and safety, diversity and equity policies (DEI), training and professional development, respect for human rights throughout the supply chain, relations with local communities.
• Governance: composition and independence of the board of directors, transparency in reporting, anti-corruption policies, risk management, link between executive remuneration and long-term performance.

Environmental

The Environmental dimension concerns the impact a company has on the natural environment through its activities. In this area, alignment with the objectives of the Paris Agreement – and in particular the path towards carbon neutrality by 2050 – has become an obligatory reference for large companies. Companies such as Microsoft and Apple have set carbon neutrality or even carbon-negative targets, while in Europe the EU Green Taxonomy provides a regulatory framework that classifies economic activities according to their environmental sustainability, with direct consequences for access to capital.

Social

The Social component assesses the company’s relationship with people: its own employees, suppliers, local communities, and society as a whole. The relevance of this dimension emerged strongly after the Covid-19 pandemic, which put the spotlight on the treatment of workers, the robustness of corporate welfare systems, and companies’ ability to support communities in times of crisis. Today, the S of ESG is the dimension where investors find it hardest to measure progress – because indicators are often less standardised than environmental ones – but also the one that increasingly affects reputation and the ability to attract talent.

Governance

Governance is the dimension concerned with how a company is directed and controlled. Sound governance is the foundation on which the entire ESG credibility of an organisation rests: without it, environmental and social commitments risk remaining declarations of principle without verification. The Wirecard case – the German fintech that collapsed in 2020 after the discovery of a €1.9 billion accounting hole, undetected for years by auditors and regulators – made clear how weak governance can bring down even apparently solid companies. It is no coincidence that, after that scandal, investor pressure for more rigorous and transparent standards intensified across Europe.

Why ESG matters for companies and investors

The question many ask is: why should a company engage in ESG management beyond regulatory obligations? The most immediate answer concerns the capital markets. ESG funds – those that incorporate environmental, social, and governance criteria into their investment decisions – have reached assets under management of trillions of dollars globally, and the share of institutional investors integrating ESG factors into their analyses is growing steadily. For listed companies, having a good ESG score means access to a broader pool of investors and often to more favourable financing conditions.

But the value of ESG goes beyond finance. Companies that seriously manage all three dimensions tend to be more resilient in times of crisis, because they have more robust governance structures, better relationships with communities and regulators, and a greater ability to anticipate risks – climate, reputational, legal – before they become emergencies. A McKinsey study found that companies with high ESG performance show on average a lower cost of capital, higher labour productivity, and less volatile results over time.

On the regulatory front, the European framework is becoming increasingly stringent. The Corporate Sustainability Reporting Directive (CSRD), in force since 2024, extends the obligation to report on sustainability to tens of thousands of companies in the European Union, making the ESG report – or sustainability report – no longer a voluntary document but a mandatory obligation. For companies that have not yet prepared themselves, time is running out.

Advantages and challenges of the ESG approach

Adopting a structured approach to ESG brings concrete advantages, but also challenges that would be wrong to underestimate. Knowing both is the most honest way to assess what it truly means to integrate ESG criteria into a company’s strategy.

Among the challenges, greenwashing deserves further attention. The term refers to the practice of communicating environmental and social commitments in an exaggerated or misleading way, without concrete actions to back them up. As interest in ESG has grown, greenwashing has become an increasingly serious reputational and legal risk: European and American supervisory authorities have launched investigations and imposed sanctions on asset managers and companies that were reporting ESG performance that did not correspond to reality. Transparency and verifiability of data, therefore, are not just good practice: they are a necessity.

Examples of ESG practices in companies

Translating ESG criteria into concrete practices is the most important – and most demanding – step for any organisation. The examples below show how the three dimensions play out differently depending on the sector and company size, but with one constant: the link between declared commitments and measurable results.

In the energy sector, several European utilities have launched programmes to progressively divest fossil assets and expand renewables, accompanied by emissions reduction targets verified by third parties and communicated through annual ESG reports aligned with GRI (Global Reporting Initiative) or SASB standards. In Italy, companies have integrated sustainability objectives into multi-year strategic plans, linking part of management variable remuneration to the achievement of specific ESG targets.

On the social front, many manufacturing companies have launched systematic supplier audits to verify compliance with workers’ rights throughout the supply chain, an issue that became urgent after scandals such as Rana Plaza in 2013, the collapse of a textile factory in Bangladesh that claimed over 1,100 lives. On the governance side, the global trend is towards more diversified boards and greater separation between the roles of chairman and chief executive, to reduce concentrations of power.

In the gas distribution sector too, where sustainability is an integral part of the industrial strategy, the ESG approach translates into precise operational choices. The main ones include:

• Investment in reducing network losses, with a direct impact on methane emissions into the atmosphere.
• Renewable gas infrastructure upgrades to enable the transport of biomethane and hydrogen, in line with European decarbonisation
• Community engagement programmes in the territories served, as a concrete expression of the Social dimension.
• Publication of an annual ESG report with third-party verified indicators, to guarantee the transparency and credibility of declared commitments.
• A portion of management variable remuneration linked to the achievement of measurable ESG objectives, to align incentives with the long-term strategy.

Conclusions on the role of ESG in sustainability

ESG is neither a bureaucratic obligation nor a communication strategy: it is a different way of conceiving the role of companies in society and in the economy. A company that seriously integrates ESG factors into its strategy is not simply responding to investor or regulatory pressure: it is building a more robust business model, better able to adapt to change and more legitimate in the eyes of its stakeholders.

The path is not without obstacles. The proliferation of standards, the difficulty of measuring performance in a homogeneous way, the risk of greenwashing, and the complexity of engaging the entire value chain are real challenges that require commitment, expertise, and investment. But the direction is set, and the signals – regulatory, market, and cultural – indicate that ESG will not return to being a niche topic.

For companies managing essential infrastructure, adopting a structured ESG approach is also a response to the growing expectation of civil society: that those who manage common assets – networks, resources, services – do so with responsibility, transparency, and a long-term vision. In this sense, the link between ESG meaning and sustainability is much more than an accounting equation: it is the operational translation of a pact between company and society.