Principles of Sustainability and ESG: ESG Fundamentals What is ESG Environmental Social Governance Definitions and History

Study Guide –?What is ESG (Environmental, Social, Governance) – Definitions and History
Designed for finance, operations, compliance professionals moving into ESG roles and for students who need a ready?to?use reference.

What This Is

ESG is the umbrella term for the three categories of non?financial performance that investors, regulators, and other stakeholders use to assess a company’s long?term risk and impact. It started as a “screening” tool for socially responsible investing and has become a mandatory disclosure regime. Real?world example: A mid?size steel producer (e.g.,?U.S.?Steel) quantifies its Scope?3 emissions from purchased electricity, freight, and end?use of its steel to meet the EU?Corporate Sustainability Reporting Directive (CSRD) and to set a science?based net?zero target.

Key Terms & Standards

• GHG Protocol – The World Resources Institute & World Business Council for Sustainable Development (WRI?WBCSD) standard for measuring greenhouse?gas emissions; defines Scope?1 (direct), Scope?2 (indirect energy), and Scope?3 (value?chain) categories. First released 2001, latest version 2021.
• TCFD – Task Force on Climate?Related Financial Disclosures, created by the Financial Stability Board (FSB) in 2017; a framework (not a standard) for climate?risk reporting, with recommended disclosures in governance, strategy, risk management, and metrics.
• ISSB – International Sustainability Standards Board (IFRS Foundation) that issues IFRS?S1 (General Requirements) and IFRS?S2 (Climate?related Disclosures) effective 1?Jan?2024; aligns global ESG reporting with the “single?global?standard” vision.
• CSRD – EU Corporate Sustainability Reporting Directive, adopted 2022, applicable to all large EU?registered companies and non?EU firms with €150?M turnover in the EU from FY?2024 onward; introduces double materiality and mandatory assurance.
• SEC Climate Disclosure Rule – U.S. Securities and Exchange Commission final rule (effective 1?Jan?2023, phased?in 2024?2025) requiring public companies to disclose Scope?1?2 GHG data, climate?related risks, and governance.
• SASB – Sustainability Accounting Standards Board (now part of the ISSB) that provides industry?specific materiality?focused standards (e.g.,?SASB?Metals & Mining) for investors; most standards were superseded by IFRS?S1/S2 in 2024 but remain useful for transition.
• GRI – Global Reporting Initiative, the most widely used impact?reporting framework (GRI?Standards 2021) that emphasizes stakeholder relevance and covers environmental, social, and governance topics.
• Double Materiality – Concept that companies must report (1) how ESG issues affect the firm’s financial performance (financial materiality) and (2) how the firm’s activities affect the environment and society (impact materiality). Codified in the EU?CSRD and emerging in the ISSB’s “value?chain” guidance.
• Science?Based Targets (SBTi) – Methodology administered by the Science Based Targets initiative (2021?present) that validates corporate net?zero or emission?reduction targets against the Paris Agreement’s 1.5?°C pathway.
• Carbon?Intensity Metric – Ratio of GHG emissions to a business?relevant denominator (e.g.,?tCO?e/£?revenue or tCO?e/tonne product). Used by TCFD and ISSB to benchmark performance.
• Materiality Matrix – A two?axis chart (impact on business vs. impact on society) that visualises single vs. double materiality; the matrix guides stakeholder engagement and disclosure prioritisation.

Step?by?Step / Process Flow –?Conducting a Materiality Assessment (Typical for a manufacturing firm)

1. Define Scope & Stakeholder Set – List internal business units, external stakeholder groups (investors, regulators, NGOs, customers, suppliers) and decide the geographic and value?chain boundaries (e.g.,?Scope?3 upstream/downstream).
2. Gather Data – Use surveys, interviews, and secondary research (industry reports, ESG ratings) to collect perceived importance scores for each ESG issue.
3. Quantify Business Impact – Map each issue to financial metrics (revenue exposure, cost of capital, operational risk) using historical data or scenario analysis (e.g.,?climate?related revenue loss under a 2?°C scenario).
4. Plot the Materiality Matrix – Place issues on the X?axis (impact on business) and Y?axis (impact on society/environment). Issues in the top?right quadrant are double?material and become disclosure priorities.
5. Validate & Prioritise – Review the draft matrix with senior leadership and the board’s ESG/ risk committee; adjust based on regulatory thresholds (e.g.,?CSRD?requires reporting of all double?material topics).
6. Integrate into Reporting – Align the final material topics with the chosen reporting framework (IFRS?S2, GRI, or SASB) and embed them in the ESG narrative, KPI tables, and assurance scope.

Common Mistakes

ESG Interview / Exam Tips

1. Distinguish ESG vs. CSR – Be ready to say ESG is a risk?management and value?creation framework that is increasingly mandatory, whereas CSR is a voluntary, often philanthropic activity.
2. Explain Double Materiality – Highlight that the EU?CSRD (2022) forces companies to disclose both financial?material and impact?material topics; contrast with the “single materiality” approach still common in U.S. SEC filings.
3. Scope?2 Nuance – Know the difference between location?based (grid emission factor) and market?based (purchased renewable certificates) and be able to calculate both using the formula:
   Scope?2?=(Electricity?Consumed?×?Emission?Factor).
4. TCFD vs. ISSB – TCFD is a framework (four pillars) that guides narrative disclosure; ISSB’s IFRS?S2 translates those pillars into prescriptive standards (e.g.,?Metric?1: GHG emissions, Metric?2: Climate?related targets).

Quick Check Questions

1. Scenario: A European automotive supplier must report its climate?related risks for FY?2024. Which framework will the regulator most likely require?
   Answer: ISSB?IFRS?S2 (mandatory under the EU?CSRD from 2024).
   Explanation: CSRD adopts the ISSB standards as the “single global standard” for climate disclosures.

2. Scenario: A bank wants to assess the physical climate risk of its loan portfolio. Which TCFD pillar does this analysis belong to?
   Answer: Strategy pillar (scenario analysis of climate impacts on business).
   Explanation: TCFD’s Strategy section asks for the resilience of the organization’s business model under different climate scenarios.

3. Scenario: A consumer?goods company sets a 2030 net?zero target and asks for validation. Which initiative should you reference?
   Answer: Science?Based Targets initiative (SBTi).
   Explanation: SBTi provides the methodology to ensure the target aligns with the Paris 1.5?°C pathway.

Last?Minute Cram Sheet (10 One?Liners)

1. TCFD = Task Force on Climate?Related Financial Disclosures – a framework, not a standard.
2. GHG Protocol (2021) – defines Scope?1,?2,?3; the only globally accepted emissions accounting method.
3. CSRD (EU, effective 2024) – introduces double materiality and requires limited assurance on ESG data.
4. SEC Climate Rule (2023?2025 rollout) – mandates Scope?1?2 GHG reporting and climate?risk governance disclosure for U.S. public firms.
5. ISSB IFRS?S1/S2 (effective 1?Jan?2024) – the “single global standard” for ESG reporting; replaces most SASB standards.
6. SASB (now part of ISSB) – industry?specific materiality focus; still useful for transition projects.
7. GRI (2021) – the most widely used impact?reporting framework; emphasizes stakeholder relevance.
8. Location?based vs. Market?based Scope?2 – both required; the former uses grid emission factors, the latter uses contractual renewable purchases.
9. Carbon?Intensity Metric – e.g., tCO?e/£?revenue; a key KPI in TCFD and ISSB disclosures.
10. Double Materiality – EU?CSRD & upcoming ISSB guidance require reporting on (a) financial impact of ESG on the firm and (b) firm’s impact on environment/society.

Use this guide as a checklist when you build ESG disclosures, prepare for interviews, or study for certifications. The concepts are concise, the calculations are ready?to?apply, and the regulatory dates are up?to?date as of 2024?2025.