What Is ESG? Why Do Investors Look at Environmental and Social Scores?

ESG stands for Environmental, Social and Governance, and refers to the framework used to assess a company's performance and risks in these three areas. The concept first emerged in 2004 with the United Nations Global Compact report "Who Cares Wins." Today, it has become a criterion used directly in investment, lending and supplier selection decisions.

What Is ESG and How Does It Differ from Sustainability?

Sustainability is a broad goal describing a company's ability to survive in the long term without harming the environment, society or the economy. ESG is that goal translated into measurable terms that investors can understand.

For example, saying "we care about the environment" is a statement of intent. Measuring annual carbon emissions, setting a reduction target and reporting progress against that target is ESG performance. Investors look at this measurable data rather than at intentions.

What Are the ESG Criteria?

ESG criteria fall under three main headings:

• Environmental (E): Greenhouse gas emissions and carbon footprint, energy efficiency, water use, waste management and biodiversity. For example, a factory regularly measuring and reducing its energy consumption.
• Social (S): Occupational health and safety, working conditions, equal opportunity, human rights and social risks in the supply chain. For example, auditing suppliers to make sure no child labour is used.
• Governance (G): Board structure, business ethics, anti-bribery and anti-corruption, transparency and risk management. For example, having independent board members or a channel through which employees can safely report ethical breaches.

Which of these headings matters most varies by sector. For a cement producer, emissions come first, while for an apparel manufacturer, working conditions in the supply chain may be more critical.

Why Do Investors Look at ESG Scores?

Thinking of ESG as a sign of goodwill is a common misconception. For investors, ESG is a way of reading risks in advance that do not yet appear in the financial statements.

A high-emitting company faces rising carbon costs as regulations such as the Carbon Border Adjustment Mechanism (CBAM) and the Türkiye Emissions Trading System take effect. A human rights scandal in the supply chain can lead to lost customers and legal problems. Weak governance undermines trust in the financial information a company discloses.

Regulators are moving in the same direction. In Türkiye, companies above certain thresholds are required to report sustainability and climate information under the Turkish Sustainability Reporting Standards (TSRS). Borsa Istanbul selects companies for the BIST Sustainability Index based on their sustainability scores. Banks, meanwhile, are increasingly requesting environmental and social data from companies in their lending processes.

How Is an ESG Score Calculated?

There is no single official method for calculating an ESG score. Scores are set by rating providers such as MSCI, Sustainalytics or LSEG, each using its own methodology. These providers assess a company's published reports, publicly available data and controversies reported in the media together.

There are significant differences between the methods. MSCI rates companies from AAA to CCC relative to their industry peers. Sustainalytics, by contrast, scores unmanaged ESG risk; in this system, a lower score means lower risk. This is why the same company may receive different ratings from different providers. To increase transparency in this area, the European Union has placed ESG rating providers under the supervision of the European Securities and Markets Authority (ESMA) since 2 July 2026.

For a company, the way to improve its score is to focus not on the score itself but on the data behind it. Performance that is not measured and reported is often treated as non-existent by rating providers.

Where Should Companies Start Their ESG Journey?

1. Conduct a materiality assessment. Identify which ESG topics truly matter for your sector and stakeholders.
2. Build your data infrastructure. Collect emissions, energy, water, waste, occupational health and safety, and employee data regularly and in a traceable way.
3. Set policies and targets. Define measurable targets and owners for each material topic.
4. Report. Choose a framework such as TSRS or GRI based on your legal obligations and target audience.

In short, ESG is a framework that translates companies' environmental and social impacts into the language investors understand. Competitive advantage comes not from chasing a good score, but from strengthening the data, policies and management approach behind it.

At Sistem Grup, we provide sustainability consulting to businesses on their ESG roadmap, materiality assessment and sustainability reporting. To plan your company's ESG journey, get in touch with our experts.