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Sustainability as a concept has gained momentum in recent years. Firms increasingly commit to sustainability in their business processes and operations. Media attention puts even more pressure on businesses to pursue sustainability, raising questions on how to establish and measure progress towards sustainability goals.
Companies have been adopting environment, social, and governance (ESG) rules to measure adherence to sustainability in their existing business operations and keep up with these changes. ESG means adopting and incorporating environmental, social, and governance principles into company decisions (Van Duuren et al., 2016; Ertz, 2020; Hahn & Lülfs, 2014). Why is ESG so important? According to recent research (Unruh et al., 2016), ESG-focused companies are more highly valued, and ESG aspects contribute heavily to financial sustainability and performance. Companies focusing on ESG issues have a better reputation and brand image, and they also have improved risk management and control of long-term risks (Xie, 2019; Pedersen, 2020).
The United Nations (UN) and an international group of institutional investors introduced the ESG process. Responding to the increased relevance of environmental, social, and corporate governance issues in business practices, they proposed creating, by 2030, a world free of poverty, hunger, and disease. These efforts align with European Union (EU) directives that work to establish standards and benchmarks to improve company transparency in ESG reporting (Arvidsson & Dumay, 2021). Businesses understand the importance of tackling ESG goals, yet ESG remains a relatively new area, so companies need time to discern how to integrate ESG into their functioning.
On a strategic level, it is difficult for a company to tackle every aspect in all categories of ESG at a time. Thus, decision-makers must prioritize areas to focus on at any given time and determine what threshold points they should start with. Therefore, they must select the most essential aspects and ESG rules.
Several barriers to ESG have been identified. The most important is limited knowledge and expertise on ESG issues since the concept is relatively new (Hedstrom, 2018; Porter et al., 2020). Moreover, businesses sometimes fail to consider ESG aspects that may significantly impact them, and they may see a limited short-term return as a disadvantage. The EU is now moving to improve transparency obligations. Publicly quoted companies must disclose specific information about their approach to integrating sustainability risks and considering adverse impacts on sustainability (van Oostrum, 2021). Yet, these companies barely do this, and even when they do, they do not provide evidence that the presented results apply to their operation.
The role of journalism and reporting on ESG should not be underestimated. Findings from a recent cross-country study show that journalists play an essential role as informants and educators when writing about sustainable finance (Strauß, 2021). The research finds that the reporting is event-driven, putting even greater pressure on companies since such events put their brand at stake.
Greenwashing is another crucial aspect in this context. The ESG data provided by companies are often unaudited, and sustainability report data may not be reliable. Several studies have examined various greenwashing behaviors within the ESG dimensions and the circumstances under which companies engage in greenwashing (Del Bosco & Misani, 2016; King Andrew & Lenox Michael, 2001; Yu et al., 2020). These studies agree that companies exposed to greater scrutiny—that is, adequate supervision of their working operations—are less likely to engage in ESG greenwashing.