What is ESG? Meaning and how it works in practice

The minute

• E for environmental: emissions, energy, water, waste and land use
• S for social: labour, health and safety, supply chain and community
• G for governance: board, ethics, transparency and how decisions get made

Why it matters: ESG stopped being a reputation exercise and became a condition for credit, tenders and contracts with large buyers.

Where the acronym comes from

ESG began in finance as a set of non-financial criteria to assess long-term risk, and moved into corporate management. The term first appeared in a 2004 United Nations report called “Who Cares Wins,” which argued that environmental, social and governance factors affect long-term investment value. What started as a framework for investors to price risk became, over two decades, a compliance requirement for companies of every size.

What the three letters actually cover

Environmental covers what a company takes from nature and what it puts back: greenhouse gas emissions (measured in scopes 1, 2 and 3 under the GHG Protocol), energy consumption, water withdrawal, waste generation and land-use change.

Social covers how a company treats people: employees, contractors, supply-chain workers and surrounding communities. It includes working conditions, health and safety records, diversity metrics and the due-diligence process applied to suppliers.

Governance covers how decisions get made and who watches: board composition, executive compensation, anti-corruption policies, audit independence and the channels available for whistleblowers.

What became mandatory

Sustainability reporting under international standards, emissions measurement and, in Brazil, carbon pricing for large emitters under the SBCE. For SMEs the pressure usually arrives first through supplier questionnaires from large clients.

At the international level, the ISSB (International Sustainability Standards Board) published two standards in 2023: S1 for general sustainability disclosures and S2 for climate-related disclosures. These are becoming the baseline that national regulators adopt or reference.

The EU’s Corporate Sustainability Reporting Directive (CSRD) requires large companies operating in Europe to report under detailed sustainability standards, with assurance requirements phasing in over time. The Omnibus I simplification directive (Directive (EU) 2026/470, in force since March 2026) narrows that obligation to companies with more than 1,000 employees and more than EUR 450 million in turnover, taking listed SMEs out of mandatory scope.

Brazil

CVM (the Brazilian securities regulator) allows publicly listed companies to report under ISSB-aligned standards. The mandatory adoption once planned for 2026 was revoked in May 2026 (CVM Resolution 244); from 2027 listed companies that do not file a sustainability report must explain why. The SBCE (Sistema Brasileiro de Comércio de Emissões) creates a cap-and-trade system for large emitters. Companies above the emissions threshold set by the regulation must monitor, report and eventually hold allowances to cover their greenhouse gas output.

For smaller companies the practical effect is indirect but real. Large buyers subject to SBCE or CVM reporting need emissions data from their supply chains (Scope 3). That demand flows down as supplier questionnaires, contractual clauses or procurement scoring criteria. A small manufacturer that cannot answer a client’s ESG questionnaire risks losing the contract, not because of its own regulatory obligation, but because of its client’s.

Standards and references that help

• ABNT PR 2030: a recommended practice published by ABNT, Brazil’s national standards body, in December 2022, with concepts, guidelines and a maturity-based assessment model across the three pillars. ABNT uses it as the basis of its ESG certification model and offers a self-assessment spreadsheet.
• GHG Protocol: the de facto standard for measuring emissions, adapted to Brazil by the Brazilian GHG Protocol Programme run by FGVces.
• GRI and ISSB: reporting standards. GRI looks at the company’s impact on the world; ISSB looks at the financial effect of sustainability topics on the company. See how to write your first sustainability report.

How it works in practice, step by step

1. Run a materiality assessment. Identify which ESG topics create financial risk or impact for your specific operation. A logistics company and a software company face different material topics.
2. Measure what you already have data for. Start with Scope 1 (direct fuel and process emissions) and Scope 2 (purchased electricity). Scope 3 (supply chain, employee commuting, product end-of-life) is harder and can come later.
3. Organise existing policies. Most companies already have employment contracts, safety procedures and anti-corruption rules. Collect them, check for gaps and assign ownership.
4. Set targets only after you have a baseline. A reduction target without a measured starting point is unverifiable.
5. Publish only what you can prove. A target without data behind it becomes a greenwashing liability.

Example: an SME supplier

A mid-sized metalworking company receives a questionnaire from a carmaker asking for Scope 1 and 2 emissions, a health and safety policy and a whistleblowing channel. Instead of answering with generic text, it gathers last year’s energy and fuel invoices and calculates its emissions, attaches the workplace accident records it already keeps for labour authorities, and formalises a reporting channel that already existed informally. Within a few weeks it answers with traceable data, and that package becomes the seed of its first sustainability report.

The most common mistake

Companies treat ESG as a communications project: they write a glossy report, announce a net-zero pledge and buy carbon offsets before they have measured their own emissions. When auditors, regulators or clients ask for the data behind the claim, there is nothing to show. The result is reputational damage and, increasingly, legal exposure. Greenwashing litigation has grown in multiple jurisdictions, with regulators and consumer-protection agencies challenging claims that lack supporting evidence.

What is still unresolved

Scope 3 measurement remains the biggest open problem. A company’s value-chain emissions often represent the majority of its total footprint, but the data depends on suppliers who may not track their own numbers. Methodologies exist (the GHG Protocol’s Scope 3 standard lists fifteen categories), but data quality varies widely and double-counting between companies in the same chain is common.

Interoperability between reporting frameworks is another gap. ISSB, CSRD and national regulations overlap but do not fully align. Companies operating across jurisdictions face duplicated reporting effort until convergence advances further.

Frequently asked questions

Is ESG the same as sustainability?

Not exactly. Sustainability is the goal; ESG is the set of criteria used to measure and compare companies.

Do small companies need ESG?

They do when a client, a bank or a tender requires it. In practice the requirement arrives through the supply chain.

What is the first concrete step?

Measure the carbon footprint and organise existing internal policies, before any communication campaign.

Is there ESG certification in Brazil?

There are certification and verification schemes, such as ABNT’s model based on PR 2030. Certification is not mandatory; what counts is having verifiable data.

Is the CVM sustainability report mandatory?

Not since CVM Resolution 244/2026. It is voluntary for listed companies, but from 2027 those that do not publish one must explain why.

Read next: how to calculate your company footprint.

Read next: carbon neutral vs net zero.

Primary sources: Who Cares Wins: Connecting Financial Markets to a Changing World (UN Global Compact, 2004); IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS Foundation, 2023); Corporate sustainability reporting (CSRD) and Omnibus simplification (European Commission, 2026); CVM Resolution 193/2023 on ISSB-based sustainability reporting, consolidated text (CVM, 2026); Law 15,042/2024 creating the SBCE, official text (Presidency of Brazil, 2024).