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Environmental Social Governance

A clear guide to Environmental, Social and Governance, covering how ESG helps businesses assess responsibility, risk, stakeholder trust and long-term strategic performance.

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Created by an experienced Head of Business and examiner

AQA | Edexcel | Cambridge | Eduqas | WJEC | OCR | GCSE

KEY POINTS

ESG stands for Environmental, Social and Governance.
ESG is a framework used to assess how responsibly a business operates beyond purely financial performance.
Environmental factors include emissions, waste, energy use, resource use and climate impact.
Social factors include employees, suppliers, customers, communities, diversity, safety and human rights.
Governance factors include leadership, board oversight, transparency, ethics, controls and accountability.
ESG can improve reputation, investor confidence, customer trust and long-term risk management.
ESG can also create costs, reporting complexity and pressure to prove that claims are genuine.
Strong exam answers judge whether ESG supports long-term strategy rather than treating it as a public relations exercise.

KEY DEFINITION

ESG

ESG stands for Environmental, Social and Governance. It is a framework used to assess how responsibly a business manages its environmental impact, social responsibilities and governance practices.

Main Explanation

Environmental, Social and Governance is often shortened to ESG. It is a framework used to assess how responsibly a business operates beyond purely financial performance. ESG considers the impact a business has on the environment, people and the way the organisation is governed.

The environmental part of ESG focuses on how business activity affects the natural environment. This can include carbon emissions, energy use, waste, packaging, water use, pollution, biodiversity, product design and climate-related risk. A business with strong environmental performance may reduce waste, use renewable energy, improve efficiency or design products that can be repaired, reused or recycled.

The social part of ESG focuses on how a business affects people. This includes employees, customers, suppliers, local communities and wider society. Social issues may include pay and working conditions, health and safety, diversity and inclusion, training, customer wellbeing, ethical sourcing, supplier standards and community impact.

The governance part of ESG focuses on how the business is directed, controlled and held accountable. Governance includes leadership, board oversight, executive pay, shareholder rights, internal controls, reporting, legal compliance, transparency and ethical behaviour. Strong governance matters because environmental and social promises are less convincing if managers are not accountable for delivering them.

ESG is useful because it encourages businesses to think about long-term risk and responsibility. A business may appear profitable in the short term, but weak ESG performance could create future problems. For example, poor environmental practice may lead to regulation, fines or customer criticism. Poor treatment of employees may reduce motivation and increase labour turnover. Weak governance may damage trust if stakeholders believe managers are not acting responsibly.

ESG can also influence investors. Some investors use ESG information to judge whether a business is managing long-term risks effectively. A business that can demonstrate strong environmental, social and governance performance may appear more resilient and better prepared for future regulation, stakeholder pressure or changes in customer expectations.

There can also be commercial benefits. ESG may improve brand reputation, customer loyalty and employee motivation. It may help a business attract staff, win contracts, reduce energy costs or strengthen relationships with communities and suppliers. In some markets, ESG performance can become a point of differentiation.

However, ESG can create challenges. Collecting reliable data, monitoring suppliers, reporting performance and improving operations can be expensive and time-consuming. Businesses with large international supply chains may find it difficult to track environmental and social impact accurately.

Another issue is greenwashing or ESG washing. This occurs when a business gives a misleading impression that its environmental, social or governance performance is stronger than it really is. If stakeholders believe claims are exaggerated or unsupported by evidence, trust can be damaged.

There may also be trade-offs. ESG investment can increase short-term costs, while the benefits may take longer to appear. Shareholders may disagree about how much priority should be given to ESG compared with short-term profit, dividends or growth. Customers may say they value responsible business behaviour but still choose cheaper products.

Overall, ESG is most useful when it is linked to real strategy, measurable action and transparent reporting. Strong exam answers should judge whether ESG helps the business manage risk, build stakeholder trust and strengthen long-term performance, while also considering cost, complexity and whether the actions are genuine.

✎ EXAMINER TIP

When answering questions on ESG, do not just list environmental, social and governance factors. Explain how they affect risk, reputation, stakeholder trust, costs, investment and long-term strategy.

KEY FORMULAS(s)

Profit and Profitability Formulas

These key formulas help you calculate different profit measures and profitability ratios used in business.

Gross Profit

Gross profit = Revenue − Cost of sales

The profit made after deducting direct costs.

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Remember: profit shows how much money has been made, while profitability shows how efficiently revenue is being turned into profit.

DATA TABLE

Income Statement for North Coast Coffee Ltd

This statement shows how revenue is converted into gross profit, operating profit and net profit.

Revenue

£250,000

Output

Fixed Costs

Variable Costs

Total Costs

Revenue

Profit / Loss

0 candles £1,200 £0 £1,200 £0 -£1,200

Net profit is the final profit remaining after all costs and expenses have been deducted from revenue.

Benefits and Risks of ESG

This chart compares the possible benefits of ESG, such as reputation and risk management, with risks such as cost, complexity and weak evidence.

WORKED EXAMPLE

Worked Example: North Coast Coffee

How many coffees must be sold to break even?

Fixed Costs

£1,800

equity + long-term debt

Break-even output = Fixed costs ÷ Contribution per unit

Contribution per unit = Selling price − Variable cost

£3.50 − £1.10 = £2.40

Step 1: Calculate contribution

£3.50 − £1.10 = £2.40

Contribution per unit is the amount each coffee contributes towards fixed costs.

BREAK-EVEN OUTPUT:

750 coffees per month

EXAM TIP

Always explain what the number means for the business. Do not just calculate the break-even point.

Create a 5 pointed blue outlined star ic

The Three Parts of ESG

This diagram shows how ESG combines environmental, social and governance factors to assess how responsibly a business operates.

APPLICATION

Unilever

Unilever provides a useful real-world example of ESG because it is a large multinational consumer goods business with major environmental, social and governance responsibilities. Its products are sold in many countries, so decisions about supply chains, packaging, ingredients, employees, consumers and corporate governance can affect a wide range of stakeholders.

The environmental part of ESG is important for Unilever because consumer goods businesses use resources, packaging, transport and energy across their value chains. Environmental performance may involve reducing emissions, improving packaging, reducing waste and managing climate-related risks. These actions can support long-term resilience, but they may also require investment and operational change.

The social part of ESG is also important. Unilever works with suppliers, employees, customers and communities across different markets. Social responsibility may involve supplier standards, worker wellbeing, customer safety, product quality and responsible marketing. Strong social performance can protect reputation and strengthen stakeholder trust.

Governance matters because ESG promises need oversight and accountability. If a business makes sustainability or social responsibility commitments, stakeholders may expect leaders and board-level structures to monitor progress and report transparently. Governance therefore helps connect ESG to decision-making rather than leaving it as a marketing message.

ESG may benefit Unilever by strengthening its reputation with customers, employees, investors and pressure groups. If stakeholders believe the business is managing environmental and social issues responsibly, this may support brand trust and long-term competitiveness.

However, ESG can create trade-offs. Improving packaging, monitoring suppliers, reporting performance and investing in more sustainable operations can increase costs. In competitive consumer goods markets, it may be difficult to pass all extra costs on to customers, especially if shoppers are price-sensitive.

The Unilever example shows that ESG is not just about being ethical. It is also about managing risk, protecting reputation, improving governance and making strategic choices about long-term performance. The key judgement is whether ESG actions are genuine, measurable and financially realistic.

This independent educational case study is not affiliated with, endorsed by or sponsored by Greggs plc. Any financial figures used alongside this example should be treated as simplified or hypothetical estimates created for teaching purposes.

ANALYSIS

EXAM FOCUS

Analysis questions require you to examine a business concept or issue in detail, breaking it down into its component parts. You should explain how and why something happens and consider its impact on the business.

How to Approach Analysis Questions

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Identify the key issue or concept

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Break it down

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Explain how and why

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Reach a reasoned conclusion

Read the question carefully and highlight the focus of the analysis.

Consider the different factors, causes or impacts related to the issue.

Provide clear explanations using business terms and links points to context.

Evaluate the overall implications for the business.

Example Analysis Question

North Coast Coffee is considering using break-even analysis before opening a second café.

Advantages

• Sales forecasts may be inaccurate.

• Assumes costs and revenue remain constant.

• External factors may reduce reliability.

• Ignores qualitative business factors.

Disadvantages

• Sales forecasts may be inaccurate.

• Assumes costs and revenue remain constant.

• External factors may reduce reliability.

• Ignores qualitative business factors.

Key Exam Tip

If you find it difficult to expand your answer and show the type of depth that an examiner is looking for in a top response, consider using the 'so what' approach.

Tesco carry out market research - so what? - this allows them to better understand customer needs - so what? as a result Tesco can provide goods more likely to sell - so what? - this will increase Tesco profit and ensure higher levels of customer satisfaction - so what? this means that customers are likely to become more loyal to Tesco.

Avoid These Exam Traps

Students often lose marks on calculation and analysis questions by making these mistakes. Watch out for them in your exam!

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Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.

Tip:

Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.

2

Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.

Tip:

Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.

3

Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.

Tip:

Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.

Be precise. Read the question carefully. Show your working.

Small mistakes can cost big marks.

EXAM PRACTICE

Practice Question

Apply your knowledge of profit and profitability to answer this exam-style question.

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MINI CASE STUDY

North Coast Coffee Ltd is a premium coffee business which sells freshly roasted coffee beans through its online store and a small chain of independent cafés. The business has experienced strong sales growth due to increasing demand for high-quality speciality coffee products.

The business generates annual revenue of £250,000. Its cost of sales, including coffee beans, packaging and direct production costs, totals £100,000. North Coast Coffee Ltd also faces operating expenses of £80,000, including marketing, employee wages, rent and administration costs. In addition, the business pays £20,000 in interest and taxation each year.

The owner, Mia Thompson, is reviewing the company’s profitability because rising wage costs and increased competition in the premium coffee market have started to place pressure on operating profit margins. She is considering increasing prices slightly in order to protect profitability while still maintaining customer demand.

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EXAM QUESTION

Analyse the possible reasons for BrightBite’s falling profit margins and evaluate strategies it could use to improve profitability.

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HOW TO ANSWER

P

Point

E

Explain

A

Apply

C

Consequence

H

However...

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MODEL ANSWER

P

Point

Increasing prices could improve the profitability of North Coast Coffee Ltd because each sale would generate a larger amount of revenue and potentially increase profit margins.

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EXAMINER TIP

For full marks, make sure you analyse causes rather than just listing them, and evaluate realistic strategies with clear judgement. THINK: Which strategy would have the biggest impact and why?

CALCULATOR

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