In recent years, the acronym ESG has come to occupy a central place in discussions about the future of companies and the global economy. More than a corporate trend, these three letters represent a set of practices that redefines the way in which organizations relate to the planet, to people, and to their own management structures. Understanding what is behind this concept has become essential for managers, investors, and for everyone who wants to understand the direction of corporate sustainability.

The roots of this discussion, however, predate the acronym itself. In 1994, the British John Elkington, consultant and entrepreneur in the area of corporate responsibility, coined the term Triple Bottom Line (TBL), or “sustainability tripod”. The idea was to provoke companies to look beyond financial profit and also consider their social and environmental impacts - what became known as the “3 Ps”: people, planet, profit (people, planet and profit). The concept served as the basis for initiatives such as Global Reporting Initiative (GRI) and directly influenced what would come to be called ESG.

A decade later, in 2004, the discussion gained a new impetus. Kofi Annan, then Secretary General of the United Nations, launched a challenge to the leaders of 50 of the world's largest financial institutions: how would it be possible to incorporate environmental, social, and governance criteria into investment decisions? The result was the report Who Cares Wins (“Who cares, wins”, in free translation), prepared by the UN Global Compact in partnership with the World Bank. It was in this document that the acronym ESG appeared for the first time, consolidating the idea that companies with solid practices in these three dimensions tend to perform better in the long term. Since then, the agenda has continued to grow and today it guides business decisions on a global scale.

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What does ESG stand for?

ESG stands for the English terms Environmental, Social and Governance. In Portuguese, it refers to the environmental, social, and governance dimensions that came to be considered when evaluating the performance and sustainability of organizations. These three elements act as interdependent pillars that guide the actions of companies in the face of the challenges of the 21st century.

According to Annelise Vendramini, professor and researcher in sustainable finance at the São Paulo School of Business Administration of the Getúlio Vargas Foundation (FGV EAESP), the most objective way to understand the importance of ESG is to recognize that environmental, social and governance issues represent important risks for any business. “If they are not well managed, if they are not comprised of the tools for strategic business risk management, they can compromise the company's ability to generate economic value and can destroy the economic value that was generated,” he explains.

The three pillars of ESG

The acronym ESG is supported by three pillars: environmental, social, and governance. Learn the meaning and scope of each of them below.

Environmental

This pillar covers all practices related to the impact of business operations on the environment. It includes the management of water use, energy consumption, waste treatment, greenhouse gas emissions, the preservation of biodiversity, and the commitment to the circular economy, for example.

Social

The social component encompasses the way in which the company relates to its employees, to neighboring communities, to suppliers and to customers. This includes topics such as diversity and inclusion, working conditions, occupational health and safety, respect for human rights in the supply chain, and contribution to the development of communities.

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Governance

Governance concerns management structures, transparency, and business ethics. It ranges from the composition of the board of directors to compliance practices, the fight against corruption, data protection and accountability to different stakeholders.

Although they are presented separately for didactic purposes, the division between the ESG pillars is more operational than conceptual. “At the strategic level of the company, these issues are viewed in an integrated manner. At the tactical and operational level, it is necessary to divide it into actions and projects to create monitoring indicators”, explains Annelise.

Why are ESG practices important?

The relevance of ESG goes beyond a question of image or market positioning. It's about recognizing that companies are part of society and operate within a planet with well-defined environmental limits. As the FGV researcher points out, “the company is not related to society, it is part of society. When we look at the challenges we face today, such as social issues and the reduction of inequalities, this is part of the spirit of our times”.

This vision is supported by concrete data. Um McKinsey consultancy study, published in 2023, analyzed more than 2,200 publicly traded companies and concluded that those with superior performance in growth, profitability, and ESG practices registered returns to shareholders two percentage points higher than those that stood out only in financial metrics. The study indicates that a strong commitment to ESG adds additional value for shareholders, provided that the company also has good management fundamentals.

In addition, the ongoing global transformations require attention from business leaders. “The climate is changing, the conditions affecting business operations are changing. A good manager can't ignore the facts,” says Annelise. The consequences of not acting, according to the professor, often translate into losses in margin, market share, and profitability.

How are companies applying ESG?

The implementation of ESG practices begins with a well-structured process of identifying material issues, those that are most relevant to each specific business. A financial institution will have priorities different from those of a cosmetics industry or a pulp company. The fundamental thing is for the organization to map its impacts and develop actions to minimize the negatives and potentiate the positives.

In practice, companies have adopted initiatives such as carbon emission reduction targets, diversity and inclusion programs, investments in renewable energy, responsible management of water resources, development of renewable products, and strengthening governance practices.

An example of consistent application of these practices are the Commitments to Renew Life, from Suzano, a Brazilian multinational pulp and paper producer. The initiative sets goals aligned with the UN's Sustainable Development Goals. Commitments include, for example: helping to remove 200,000 people from the poverty line, removing 40 million tons of carbon from the atmosphere, and connecting 500,000 hectares of forest fragments through ecological corridors.

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What are the advantages of adopting ESG practices in business?

The adoption of ESG practices brings concrete benefits to companies. Annelise highlights three key advantages. “The first, and the most obvious, is to have access to markets where this has become increasingly important, such as Europe and parts of Asia. And there are sectors in which the issue of socio-environmental protection has become fundamental”.

The second advantage relates to access to capital. Companies with good ESG practices are able to relate to investors and financial institutions willing to offer resources with longer terms, more attractive rates, and greater strategic alignment.

The third point is reputation and legitimacy management. “Nowadays, it's impossible to protect your reputation if you don't incorporate these issues to some extent. Nobody wants to establish a long-term contract with a company that does not have a good reputation, that is not seen as legitimate,” says Annelise.

Conclusion: ESG must be a commitment

It is important to emphasize that ESG must be a genuine commitment, and not just an empty discourse, since the current moment is that of a new phase of the sustainability agenda, marked by greater rigor in the verification of data and indicators.

“More and more institutions, whether companies, regulators or consumers, are concerned about whether that information is true, whether it represents the entire engagement and what the company is doing,” says Annelise. The path, therefore, is one of transparency, coherence, and real commitment to transformation.

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