ESG: what is it and is it becoming ever more important?

Thomas van Hövell tot Westervlier - Get in touch Attorney-at-law / Senior Associate

ESG stands for Environment, Society and Governance. The assessment of a company’s sustainability is based on the impact that company has on the environment (waste, pollution, etc.), the impact on society (working conditions, health and safety, etc.) and how a company is managed (e.g., executive remuneration, diversity and signs of corruption or bribery, etc.).[1]


Certain investors look at ESG factors to determine whether or not to invest in a company. In some cases, the background of those investors plays a role. For example, ESG factors are of great importance to public investment funds,[2] and some private sector investment funds have been set up specifically to invest in sustainable companies and attach great importance to ESG factors.[3] Other investors are under social pressure to pay more attention to ESG factors, e.g. Pension Fund ABP, which has decided to reduce its investments in fossil fuel producers as a result of such pressures.[4]

Financial factors

Financial factors also increase the importance of ESG criteria. Indeed, Harvard research shows that companies that considered not only financial factors but also ESG factors performed significantly better over an 18-year period than those that did not.[5] KPMG believes that paying heed to ESG factors is critical to the success of companies in all sectors.[6]

Legal developments

Developments increasing the importance of ESG factors are also seen on the legal front. Notably, the European Commission and the ECB have published sweeping directives and regulations in both 2020 and 2021 requiring banks to integrate ESG risks into their strategy and operations, which should help banks understand the extent to which their customers are adequately adapting to the impacts of climate change.[7] ESG factors may therefore become relevant (in addition to financial factors) to determining whether a company will obtain financing from a bank. Previously, Jason van de Pol and Joep Minderhoud wrote the blog ‘The Future of ESG Disclosure Obligations‘.


Shareholders can exert influence on the decision-making within a company and, as a result, on the degree to which that company pays heed to the ESG factors. One way to do this is to include in a shareholder agreement that the company will focus on applying the 10 principles of the UN Global Compact in its business operations. These principles provide, for example, that companies must (i) respect human rights, (ii) work towards ending forced and child labour, (iii) encourage the development and use of environmentally friendly technologies, and (iv) fight corruption. In addition to financial reports, the board may be asked to provide ESG-related reports, allowing shareholders to assess the extent to which the company considers ESG factors.

Mergers and acquisitions

The importance of ESG is growing in mergers and acquisitions, as ESG reports are increasingly included in audits and ESG assurances may be requested.[8] Given the above, it is important for a business owner to be aware of the impact ESG has on the company and identify it in a timely manner.

Please contact Thomas van Hövell tot Westervlier if you have any questions about ESG or if you’d like to know what we can do for you.


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