How-to guide: How to understand and implement the ‘E’ in environmental, social and governance (ESG)

Introduction

This how-to-guide provides guidance for in-house counsel and their teams to be able to understand and effectively develop and implement the ‘environmental’ (‘E’) aspect of an organisation’s environmental, social and governance (ESG) agenda.

The guide covers the following:

What is the ‘E’ in ESG?
The importance of the ‘E’ in ESG
How to measure the ‘E’ in ESG
How much focus should there be on the ‘E’
Practical implementation steps

It can be read in conjunction with How-to guides: Understanding environmental, social and governance (ESG); What general counsel (GC) need to know about environmental, social and governance (ESG); How to consider and navigate the consequences of ESG risks; and How to understand and implement the ‘S’ in environmental, social and governance (ESG).

The ‘E’ in ESG stands for the environmental factors that an organisation should consider, such as the organisation’s effect on the climate and its impact on greenhouse gas emissions, waste management and energy efficiency. There has been a shift towards standardising environmental metrics, particularly with mandatory frameworks such as the Task Force on Climate-related Financial Disclosure (TCFD) in the UK and the EU’s Corporate Sustainability Reporting Directive (CSRD) and Taxonomy Regulation. These introduce defined disclosures on greenhouse gas emissions, energy use, sustainable economic activities and other impacts. There are also several frameworks put together by non-profit organisations that provide guidance for best practice:

The Global Reporting Initiative (GRI) publishes a set of standards for responsible environmental, social, economic and governance conduct covering a wide range of topics.
The International Sustainability Standards Board (ISSB) develops standards that will result in a global baseline of sustainability disclosures focused on the needs of investors and the financial markets.
The Sustainability Accounting Standards Board (SASB) publishes industry-based standards relevant to financial performance in 77 different industries and designed to help companies disclose financially material sustainability information to investors. Ownership of SASB Standards and projects has transitioned to the ISSB at the IFRS Foundation, which has committed to evolving the SASB standards, enhancing them for international applicability.

The environmental parameters that are generally evaluated under the ‘E’ in terms of these frameworks are as follows:

climate change;
carbon footprint;
air pollution;
resource depletion;
waste;
water pollution and water scarcity;
packaging;
deforestation;
biodiversity.

Section 2 – The importance of the ‘E’ in ESG

With the frequency of extreme weather and climatic events increasing, and discussions around climate change becoming more urgent, there is increased scrutiny on companies to assess and understand the effect their business practices are having on the environment. The Carbon Majors Report from 2024 suggests that a mere 57 corporate and State- producing entities are responsible for 80% of global greenhouse gas emissions. This suggests that company action in addressing their environmental impacts is essential to tackle the growing climate emergency.

Aside from the climate implications of companies neglecting their environmental responsibilities, the steps that companies take in addressing climate change have been linked to their sustainability and financial growth. As concerns around climate change grow, companies that are seen to be environmentally dangerous may face repercussions not only legally, but also with consumers and the public, who have been shown to increasingly support more eco-friendly and sustainable businesses.

According to a 2024 report from Morgan Stanley Institute for Sustainable Investing, individual investors’ interest in sustainability is on the rise, with 77% of individual investors globally saying they are interested in investing in companies or funds that aim to achieve market-rate financial returns while also considering positive social and/or environmental impact. In addition, more than half (57%) say their interest has increased in the last two years, while 54% say they anticipate boosting allocations to sustainable investments in the next year. Being more environmentally conscious helps to bring down costs, with a focus on the ‘E’ encouraging businesses to cut down on resource consumption and increase energy efficiency, thus reducing expenditure and increasing profits.

Younger generations entering the job market are becoming increasingly aware of environmental issues and may opt to choose employers who are more eco-conscious. According to a 2024 publication by Marsh and McLennan, Gen Z makes up 25% of the global population and, by 2030, will constitute about 30% of the US workforce. These generations place greater importance on environmental and social concerns than their predecessors did – and will expect more from employers on these issues. According to the 2024 Edelman Trust at Work Barometer, 72% of surveyed employees stated that when considering a job, the opportunity to engage in meaningful work and help address social problems is either a strong expectation or a deal breaker.

Also, there has been an increase in legislation requiring companies to conduct due diligence in relation to environmental and human rights concerns; for example, in Germany, the Supply Chain Due Diligence Act was passed in June 2021. Similar laws have been passed in France and Norway. On 5 July 2024, the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) was officially published. The CSDDD requires in-scope companies to conduct due diligence on, and take responsibility for, environmental harm throughout their value chains. In addition, the Corporate Sustainability Reporting Directive (CSRD), which came into force on 5 January 2023, strengthens the rules concerning the social and environmental information that companies have to report. Both directives are currently under review as part of the Omnibus Simplification Package, which, according to the European Commission, aims to simplify EU rules and boost competitiveness, and unlock additional investment capacity.

For further information see Quick view series: Understanding the Corporate Sustainability Due Diligence Directive (CSDDD) – 1. Introduction to the CSDDD and EU Omnibus tracker.

In Asia, both Thailand and South Korea have introduced mandatory human rights and environmental due diligence bills in 2025.

The 29^th United Nations Climate Change Conference (COP29) in 2024 focused on scaling up climate finance, that is the funding needed to help lower-income countries transition to zero-carbon economies, and to help the most affected communities adapt to the effects of climate change. The key outcome of the conference was the agreement of a new climate finance goal, the ‘new collective quantified goal’ (NCQG). Countries agreed to work towards an overall aspirational goal of $1.3 trillion per year, comprising an agreed target of ‘at least £300 billion’ a year in international climate finance from ‘developed’ countries from 2035.

Section 3 – How to measure the ‘E’ in ESG

The main challenges when it comes to measuring the ‘E’ in ESG are the following:

lack of a standardised framework for measuring environmental impact;
quantifying what falls under the ‘E’;
a lack of consistency across ESG rating providers; and
prioritising stakeholder interests over environmental concerns.

One of the main challenges to measuring the ‘E’ in ESG is the absence of a common framework through which to communicate steps that businesses have taken to tackle environmental issues. This makes it difficult to quantify what falls under the ‘E’.

Several different frameworks have emerged that measure the ‘E’ in ESG, and ESG generally. However, ESG performance across different frameworks is inconsistent, as previous research by the Office for Economic Co-operation and Development (OECD) showed. This means that it is difficult to precisely measure the impact companies may be having on the environment.

For example, the methodology of some frameworks will focus more on environmental impacts, whilst others will focus more on the financial materiality of addressing the ‘E’ in ESG. Environmental impacts are judged on differing metrics, with some not giving a clear indication of a company’s actual environmental impact at all. The OECD’s analysis of different ESG score providers found that a higher score on the ‘E’ pillar of a company’s ESG rating does not necessarily equate to a low environmental impact in reality.

Frameworks that are more financially oriented or that try to cater to stakeholder interests may lead to an increase in greenwashing, a phenomenon whereby companies mislead consumers and stakeholders as to the sustainability and environmental consciousness of their products and practices. For example, the clothing brand H&M was found to have been presenting misleading data about the sustainability of their clothing products using sustainability scorecards based on the Higg Materials Sustainability Index. H&M allegedly made claims about the sustainability of their products that were ultimately false.

On 19 November 2024, Regulation (EU) 2024/3005 on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities, was adopted to make rating activities in the EU more consistent, transparent and comparable to boost investors’ confidence in sustainable financial products.

For more information and guidance on greenwashing, see How-to guide: How to understand and avoid the risks of greenwashing.

There are several ways in which organisations can overcome the challenges set out above and effectively develop and implement the ‘E’ aspect of an ESG agenda. While some challenges will always exist, it is crucial that companies are aware of them and are doing everything they can to address and minimise them. Transparency on environmental issues is key to overcoming these challenges.

Companies can ensure that they are monitoring their use of non-renewable resources and harmful emissions that they are releasing into the environment in order to measure and address their environmental impact.

As organisations become more transparent and provide a greater level of detail, more data will be available to investors, and the ‘E’ will become more quantifiable.

Section 4 – How much focus should there be on the ‘E’?

Given the dangers of climate change and as 80% of global emissions from 2016 through to 2022 can be traced to only 57 corporate and state-producing entities, it is essential that businesses place a great deal of focus on the ‘E’. However, businesses should also keep in mind that, notwithstanding the current trend towards sustainability practices and environmental consciousness, this should not detract from the social and governance aspects of ESG. Businesses need to ensure that they are striking the right balance between the three areas.

As noted above, there has been a significant rise in laws and regulations that require companies, particularly large ones, to ensure that they are combating climate change, both directly and through their supply chains. Those who do not adapt to these changes may face financial or legal repercussions and damage to their reputation. However, addressing environmental impacts alone will not satisfy new regulations. As mentioned above, the entire ESG spectrum must be considered, including human rights impacts that form part of the ‘S’ (social), and how a company governs itself under the ‘G’ (governance). Frameworks measure a company’s actions across ESG and falling short on any of the three letters could equally result in lowered investments and a tarnished reputation.

For more information and guidance on considering the ‘S’, see How-to guide: How to understand and implement the ‘S’ in environmental, social and governance (ESG)

Section 5 – Practical implementation steps

The EU has developed a taxonomy for sustainable activities that provides a list of ‘environmentally sustainable’ economic activities. Adhering to this taxonomy will help to develop globally agreed definitions of environmentally sustainable business practices.

There are currently no universal mandatory ESG reporting requirements. This creates substantial barriers to accountability for environmental impacts as there are no widely accepted metrics through which to monitor and assess these impacts. However, using a range of ESG ratings systems, such as the MSCI ESG ratings system, can be a useful start in identifying the environmental impacts of a company.

In all cases, organisations must put in place effective due diligence systems to be able to assess and report on their adverse impacts on the environment and society, and, where relevant, vice versa. This is required by several legislations across jurisdictions.

Companies required to report on their environmental impacts can refer to the relevant guidelines that accompany the different laws and standards for sustainability reporting to aid in their reporting processes.

5.1 Practical steps for law firms and organisations to consider

Despite limitations, there are several steps that companies can take to reduce their environmental impact significantly:

Establish a commitment at top management in an outward facing policy to sustainable practices, including environmental sustainability.
Increase transparency and identify the environmental impacts within their supply chain;
Identify and track the amount of resource use, waste, and carbon emissions produced across supply chains within the company;
Be forward-thinking and able to adapt to regulatory change. Companies that are prepared for the changes in the natural world, and contribute to protecting it, will be less of a risk to shareholders, and will be at less risk of incurring sanctions, reputational damage and a loss of earnings;
Travel only when necessary and use eco-friendly flights where possible; and
Switch to using digital means of communication rather than paper;
Invest in renewable energy sources and improve energy efficiency in offices, data centres, and production facilities;
Redesign products and packaging to use sustainable materials and reduce resource consumption; and
Engage employees, suppliers, and customers in sustainability initiatives, raising awareness and encouraging greener practices throughout the value chain.

5.2 Practical steps for in-house counsel to consider

Legal counsel plays a key role in assisting organisations to address the effect their operations have on the environment, and across all pillars of ESG. Here are a few key ways that legal counsel can contribute towards ensuring that environmental impacts within an organisation are considered effectively:

Strategic review – ensure consistency between disclosures in external annual reports and company strategy and board accountability for managing climate-related risks and opportunities.
Risk Assessments – legal counsel should play a key role in developing and implementing an ESG-based risk assessment framework that will identify, measure, and mitigate ESG-related risks, including environmental impact and climate related financial risks.
Awareness and training – legal counsel should familiarise themselves with a broad range of ESG-measuring frameworks and stay up to date with upcoming regulations, such as the CSDDD. This will allow them to proactively prepare the organisation, reducing future compliance risks and reputational harm. Legal counsel can also provide training and support within the organisation more broadly so that ESG and its implementation can be better understood.
Integration into existing policies – legal counsel can assist with embedding key ESG principles into existing codes of conduct, organisational policies and job roles so that ESG can be considered at every step of the organisation’s processes. They can build due diligence requirements into contracts to strengthen accountability and reduce exposure to environmental and human rights risks across the value chain.
Transparency and reporting – legal counsel should collaborate with board members and stakeholders to ensure that there is a robust and transparent reporting framework that considers all pillars of ESG. This reporting system should be clear, accurate, and accessible, and it should take care to avoid greenwashing claims by steering clear of frameworks that focus on financial metrics and stakeholder interest.
Contractual protections and supply chain oversight – legal counsel can draft supplier codes of conduct or review key environmental policies, ESG clauses, and key due diligence requirements into contracts to strengthen accountability and reduce exposure to environmental and human rights risks across the value chain.

This practical resource was produced in partnership with Ardea International.

Additional resources

S&P Global, ‘Understanding the “E” in ESG’
CNBC, ‘Sustainable investments hit record highs in 2020 – and they’re earning good returns’
Opus 2, ‘Achieving the E in ESG – aspirational or reality?’
ESG |The Report, ‘The E in ESG’
McKinsey, ‘How the E in ESG creates business value’
Bupa, ‘Gen Z seek ethical workplaces as environ-mental health burden bites’
The Guardian, ‘Millennials want to work for employers committed to values and ethics’
Economist Impact, ‘Progress on COP26 pledges: deforestation’
United Nations, ‘COP26: Together for our planet’
Sachini Supunsala Senadheera, Piumi Amasha Withana, Pavani Dulanja Dissanayake, Binoy Sarkar, Shauhrat S. Chopra, Jay Hyuk Rhee & Yong Sik Ok (2021) Scoring environment pillar in environmental, social, and governance (ESG) assessment, Sustainable Environment, 7:1, 1960097, DOI: 10.1080/27658511.2021.1960097
White & Case, ‘The Global ESG Regulatory Framework toughens up’
Linklaters, ‘China’s new ESG Disclosure Standards’

How-to guide: How to understand and implement the ‘E’ in environmental, social and governance (ESG)

Introduction

Section 2 – The importance of the ‘E’ in ESG

Section 3 – How to measure the ‘E’ in ESG

Section 4 – How much focus should there be on the ‘E’?

Section 5 – Practical implementation steps

5.1 Practical steps for law firms and organisations to consider

5.2 Practical steps for in-house counsel to consider

Additional resources

Related Lexology Pro content

How-to guides:

Checklists:

Quick views:

Other:

ESG

Company & Commercial

Environment & Climate Change

Introduction

Section 2 – The importance of the ‘E’ in ESG

Section 3 – How to measure the ‘E’ in ESG

Section 4 – How much focus should there be on the ‘E’?

Section 5 – Practical implementation steps

5.1 Practical steps for law firms and organisations to consider

5.2 Practical steps for in-house counsel to consider

Additional resources

Related Lexology Pro content

How-to guides:

Checklists:

Quick views:

Other:

Filed under

Topics