What Is ESG? Environmental, Social, and Governance Explained

ESG stands for Environmental, Social, and Governance — three categories of non-financial factors used to evaluate how responsibly an organisation operates. While ESG originated with publicly traded firms, its principles now apply equally to private companies and not-for-profits.

The three factors cover:

Environmental - How the organisation affects the natural environment through impacts like resource usage, emissions, waste, conservation, and stewardship.

Social - How the organisation manages relationships with employees, suppliers, customers, communities, and society through its labor, human rights, consumer, and community impact.

Governance - How the organisation abides by ethics, accountability, transparency, regulations, risk management, controls, and leadership structure.

Specific ESG priorities differ across industries, regions, and business models, but the common thread is assessing and disclosing how sustainably and responsibly an organisation operates.

ESG in Public Companies

For public companies, ESG performance matters because it affects risk exposure, access to capital, and long-term shareholder value. Investors increasingly screen for ESG factors when making allocation decisions.

ESG in Private Companies

Private companies have less external pressure but can still gain substantially from strong ESG management even without public disclosures. The same logic applies in terms of reducing risks, controlling costs, attracting talent, improving processes, and planning for the future. For example, minimising environmental impacts lowers energy and waste expenses. Ethical business practices reduce litigation risks. Diverse and inclusive hiring improves retention. Strict quality control and cybersecurity controls prevent costly problems.

ESG in Family-Owned Enterprises

For family-owned enterprises, ESG helps sustain multi-generational success. For private equity portfolio companies, ESG improves prospects for eventual exit. While private firms may not publish comprehensive reports, tracking ESG performance enables strategic management. Those considering eventual IPOs can prepare ESG programs well in advance.

ESG in Not-for-Profits

For not-for-profits, ESG overlaps with what many organisations already do as part of their mission. The difference is treating these areas systematically rather than ad hoc. A structured ESG approach can help not-for-profits:

• Minimise overhead costs through environmental efficiencies
• Embody fair labor practices that reflect their values
• Maintain reputations via sound ethics and good governance
• Attract passionate talent committed to their causes
• Build trust and loyalty among individual and institutional donors
• Collaborate with corporate partners on societal impact

While not-for-profits may not have shareholders, they do have stakeholders such as employees, volunteers, donors, partners, and communities. ESG programs demonstrate good stewardship of resources and effective pursuit of social missions.

Across all organisational types, board oversight of ESG is important for executing sustainable long-term strategies. Boards can enact ESG-related policies, set goals, tie executive compensation to ESG targets, appoint directors with expertise in ESG-related risks and opportunities, and ensure ethical compliance.

Even without mandated public disclosures, boards should prioritise ESG factors given their linkages to societal wellbeing, operational resilience, reputation, and organisational durability.

To implement a robust ESG program, boards should:

• Assess the organisation’s complete environmental footprint across all facilities, transportation, supply chains, and product lifecycles. Monitor impact reduction goals related to energy, water, waste, materials, biodiversity, and pollution.

• Evaluate employee relations, diversity, equity, inclusion, compensation, benefits, training, health, safety, and wellness. Guarantee ethical workplace cultures, human rights protections, and engagement initiatives.

• Institute and amplify ethics policies on issues like conflicts of interest, anti-corruption, privacy, accountability, whistleblowing, political lobbying, and risk management.

• Ensure quality control, data security, transparency, fiscal discipline, and compliance with all legal and regulatory obligations.

• Incentivise executives to prioritise ESG objectives via performance metrics and compensation structures. Appoint board members with multidisciplinary expertise in ESG-related risks and opportunities.

• Discuss ESG as a regular board meeting agenda item. Create a dedicated committee to oversee ESG programs and performance. Provide ESG training and continuing education for all directors.

ESG Reporting Frameworks

Boards that want to move beyond informal ESG tracking can adopt a recognised reporting framework. The most widely referenced are the Global Reporting Initiative (GRI), which provides detailed standards across environmental, social, and governance topics, and the International Sustainability Standards Board (ISSB) standards, which focus on financially material sustainability information. In Australia, the Australian Accounting Standards Board (AASB) finalised its sustainability reporting standards (AASB S1 and AASB S2) in 2024, broadly aligned with the ISSB’s IFRS Sustainability Disclosure Standards. Mandatory climate-related disclosure under AASB S2 applies to listed and large unlisted entities on a phased basis from 2025, while broader sustainability reporting under AASB S1 remains voluntary.

Not-for-profit boards are not typically subject to mandatory ESG reporting, but using a framework — even in a simplified form — can help structure board discussions, set measurable targets, and demonstrate accountability to donors, members, and funding bodies. A not-for-profit might, for example, report annually on its energy use, staff diversity, volunteer safety record, and governance practices without producing a full sustainability report. The discipline of tracking and disclosing this information can surface risks early and support grant applications that increasingly ask for evidence of responsible management.

ESG programs do require time and resources to set up, but the payoff is practical: better risk visibility, stronger governance processes, and a clearer picture of how the organisation affects — and is affected by — its environment and community.

Additional Resources

Climate Risk Governance – The Role of the Board

Decoding the Ethical Framework

Integrating ESG into Not-for-Profits: Managing Risks and Opportunities

Disaster and Crisis: Dilemmas and Challenges for Boards

Why Good Boards Behave Badly - Improving Your Board’s Performance Through Best Practice Boardroom Behaviours