ESG Fundamentals
Intuition
ESG stands for Environmental, Social, and Governance, three dimensions of non-financial risk and opportunity that can materially affect a company's long-term financial performance. The core argument: companies that manage environmental impact, treat employees and communities well, and maintain strong governance are more likely to generate durable returns and less likely to face regulatory, reputational, or operational surprises.
Investors, regulators, and creditors have increasingly integrated ESG factors into their decision-making. SEBI has made BRSR (Business Responsibility and Sustainability Reporting) mandatory for the top 1,000 listed companies in India from FY23, and ESG rating integration is now a standard part of institutional due diligence.
Criticism also exists: ESG data is inconsistent, ESG scores from different agencies diverge significantly, and the link between ESG scores and financial outperformance is contested in academic research. Practitioners need to be both informed about ESG and appropriately sceptical about weak or greenwashed claims.
Mechanics
Three pillars:
Environmental (E)
- Carbon emissions (Scope 1, 2, 3)
- Water usage and withdrawal
- Waste generation and disposal
- Energy intensity and renewable energy share
- Biodiversity impact
- Physical climate risk exposure
Social (S)
- Employee health and safety (LTIFR, Lost Time Injury Frequency Rate)
- Workforce diversity and inclusion
- Labour practices, supply chain standards
- Community impact and CSR
- Customer data privacy
- Human rights in the value chain
Governance (G)
- Board composition (independence, diversity, expertise)
- Promoter ownership and pledge percentage
- Related-party transactions
- Executive compensation alignment with performance
- Audit quality and transparency
- Anti-corruption policies
ESG rating agencies in India:
- CRISIL ESG Ratings, ICRA ESG Scores
- Global: MSCI ESG Ratings, Sustainalytics (Morningstar), S&P Global ESG
- Divergence between agencies on the same company is common and significant
From the research
How The Valuation Node Approaches Research
The research method behind The Valuation Node, how assumptions are stated, how sources are chosen, and how uncertainty is disclosed in every published analysis.
ValuationWhat Three Years of a Cash Flow Statement Reveals That One Year Hides
A single year of cash flow is a snapshot. Three years is a story. Learn what the trend reveals about earnings quality, funding, and sustainability.
ValuationComparing Two Companies on ROE, and Why the Higher One Is Not Always Better
Two companies can report the same ROE for very different reasons. DuPont analysis shows why an ROE built on leverage is not the same as one built on quality.
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