ESG

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What are ESG criteria in finance?

ESG criteria are non-financial factors used alongside financial analysis to assess how companies manage environmental, social, and governance issues, and how these issues may affect long-term resilience, risk, and value creation.

ESG stands for Environmental, Social, and Governance. In finance, ESG criteria are used to assess how companies manage sustainability-related risks, opportunities, and practices beyond traditional financial metrics. They help investors understand whether a company is positioned to remain resilient and responsible over the long term. 

ESG analysis does not replace financial analysis. Instead, it complements it by adding a broader view of non-financial risks such as climate exposure, labor issues, governance failures, or weak disclosure practices. 

What are the three ESG pillars?

  • Environmental: climate strategy, greenhouse gas emissions, energy use, water and resources, waste, pollution, and biodiversity impact.  
  • Social: working conditions, health and safety, diversity and inclusion, customer protection, data privacy, human rights, and supply-chain practices. 
  • Governance: board structure, executive remuneration, ethics, anti-corruption controls, transparency, audit quality, and shareholder rights.  

How are ESG criteria used in finance?

ESG criteria are used to assess an actor’s non-financial performance. This performance is also used and analyzed for:

  • Investment selection: to compare issuers and identify stronger or weaker profiles.  
  • Portfolio construction: to support ESG funds, sustainable funds, and ESG index solutions.  
  • Risk management: to detect long-term risks that may not appear clearly in financial statements.  
  • Engagement and stewardship: to encourage companies to improve disclosure and practices over time.  

Regulatory dimension: Europe and beyond

Europe is widely regarded as the most advanced ESG regulatory region because it has built a structured framework covering disclosures, sustainable activities, benchmarks, and corporate reporting.  
In Europe, several core texts shape the market. The Sustainable Finance Disclosure Regulation (SFDR) requires financial market participants and advisers to disclose how they integrate sustainability risks and, where relevant, principal adverse impacts. The EU Taxonomy provides a classification system for environmentally sustainable economic activities. The Corporate Sustainability Reporting Directive (CSRD) expands sustainability reporting requirements and improves comparability across issuers.  

Outside Europe, regulatory approaches are also evolving, although they remain more fragmented. The United Kingdom has developed Sustainability Disclosure Requirements, while the United States and Singapore have been strengthening climate- and ESG-related disclosure frameworks in different ways.  

Measurement, strengths, and limitations

  • Measurement relies on quantitative indicators, qualitative assessments, and external ESG ratings. Because methodologies differ across providers, the same company can receive materially different scores.  
  • Strengths: better visibility on non-financial risks, support for long-term decision-making, and encouragement of better corporate practices.  
  • Limitations: incomplete standardization, uneven data quality, and greenwashing risk when sustainability claims are stronger than underlying evidence.  
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