ESG has fundamentally reshaped how investors evaluate businesses — and how businesses access capital. The Covid-19 pandemic, supply chain disruptions, geopolitical conflict, and climate change have reinforced the significance of environmental, social, and governance factors for both investors and the companies they back. Investors now treat ESG performance as a proxy for risk, resilience, and long-term value creation.
This guide covers the five questions investors ask about ESG before funding, what they look for during evaluation, why governance is the most important pillar, and the reporting frameworks that meet investor disclosure expectations.
Already Managed in ESG Funds Globally
According to Harvard research, investors and businesses manage over $330 billion in ESG funds — and the figure continues to grow. ESG is no longer a niche investment category; it's mainstream capital allocation.
The Short Version
- $330B+ globally in ESG funds (Harvard) — ESG is now a primary capital allocation factor, not a niche category.
- Five core investor questions drive ESG due diligence: portfolio visibility, risk reduction, performance influence, industry best practices, and reporting frameworks.
- Governance is the most critical pillar. Investors view it as foundational — without it, environmental and social commitments lack credibility.
- Legal exposure is real: 1,800+ climate change cases filed across 40 countries (London School of Economics), with the US leading at 1,387 cases.
- Three reporting frameworks cover most investor disclosure needs: CDP (environmental data), DJSI (building ESG), and GRESB (real estate benchmark). GRI, SASB, and TCFD cover broader needs.
- How ESG Impacts Investments and Funding
- 5 ESG Questions Investors Ask Before Funding
- Why Is ESG Important for Investors?
- What Do Investors Look For in ESG?
- Which ESG Factor Is Most Important to Investors?
- The 3 Pillars of ESG
- ESG Reporting Frameworks for Investor Disclosure
- The Legal Risk of Poor ESG Performance
- Frequently Asked Questions
How ESG Impacts Investments and Funding
ESG (Environmental, Social, and Governance) has transformed how investors operate and the companies they hold in portfolios. It has changed business models, emphasized value creation through sustainability, and introduced new evaluation criteria that affect access to capital. Companies with strong ESG performance attract more investment options, face lower funding costs, and are perceived as more stable for long-term growth — making ESG a direct factor in capital access decisions.
Investors who consider ESG factors gain a more holistic view of the businesses they support — both SMEs and large corporations. The goal is to reduce risks and identify growth opportunities, improving overall efficiency and bottom line. With $330+ billion already in ESG funds globally and the figure climbing, the question for businesses today isn't whether ESG matters to investors, but whether the company is prepared to answer their questions.
5 ESG Questions Investors Ask Before Funding
Five questions drive investor ESG due diligence. Companies that prepare clear, data-backed answers to each are positioned to attract ESG-conscious capital — those that can't risk being filtered out before formal evaluation:
How can I have a consolidated view of portfolio companies' ESG performance?
Investors use ESG factors as integrated components of investment strategy. Most believe companies with efficient ESG programs and reliable financial characteristics are excellent for risk management. Investors want consolidated, comparable performance views — companies should provide clear metrics and benchmarks that make portfolio-level analysis possible.
How can I reduce my ESG-related risk exposure?
Investors consider ESG-based investment more reliable, stable, and safer. Climate change is the most significant ESG risk, having affected numerous organizations through infrastructure and property losses. Investors examine preparation assessments and response strategies for climate threats — companies must demonstrate explicit risk management plans.
How can I influence ESG performance improvements?
Investors use direct dialogue, shareholder proposals, proxy voting, policy divestment, and public policy engagement to influence portfolio companies. Companies that engage proactively — rather than waiting for shareholder pressure — build stronger investor relationships and faster decision cycles.
What are the industry best practices on ESG?
Some sectors — power, utilities, manufacturing — face complex transitions to environmentally-friendly operations. Investors evaluate whether companies follow sector best practices, integrate ESG into enterprise risk management, and embed sustainability into all relevant operational processes. Falling behind industry norms creates capital access risk.
Which reporting framework should I use for adequate disclosure?
Although ESG disclosure isn't yet mandatory at the US federal level, market influence drives the requirements. Europe has stricter rules. Investors expect companies to align with recognized frameworks — CDP, DJSI, GRESB, GRI, SASB, or TCFD — depending on industry and geography.
Why Is ESG Important for Investors?
ESG has become integral to investor strategy when funding companies — because it provides clearer pictures of operational performance, supports informed decisions, and reduces investment risks. Investors want assurance that companies they back focus on ethical, sustainable, and environmentally-conscious practices.
ESG investing considers specific factors because they materially affect business performance. Each pillar addresses a distinct investor concern:
What investors evaluate
- Greenhouse gas emissions
- Toxic chemicals usage
- Manufacturing carbon footprint
- Supply chain sustainability
What investors evaluate
- LGBTQ+ equality
- Racial and ethnic diversity
- Recruitment programs
- Inclusion policies
What investors evaluate
- Executive pay structures
- Leadership diversity
- Board response to shareholders
- Management transparency
What Do Investors Look For in ESG?
ESG risk can substantially affect company performance and value. Investors evaluate three categories of factors during ESG due diligence — each measurable, each material:
Likelihood of Adverse Events
Probability estimation of regulatory changes affecting performance. Likelihood measurement for environmental events: natural disasters, earthquakes, hurricanes, climate-related disruption.
Impact of Specific Events
Business model alignment with ESG requirements. Strategy for carbon tax. Compliance with new laws and climate regulations. How the company adapts to specific event categories.
Shareholder Communication & Engagement
Quality of community, employee, and customer interaction. Whether the company understands its perception of risk and the impact of ESG factors on brand and operational performance.
Governance Risk Areas Investors Track
Which ESG Factor Is Most Important to Investors?
Among the three ESG pillars, governance is the most significant factor investors consider. Corporate governance following recognized standards builds trust, ensures operational transparency and accountability, and demonstrates ability to manage long-term risk.
There's a strong correlation between governance performance and overall ESG risk management at the corporate level. Investors view governance as foundational — without it, environmental and social commitments lack credibility and can't be defended under scrutiny.
Governance ensures operations are transparent, ethical, reliable, and accountable. For investors, it's the lens through which all other ESG performance is evaluated. A company with strong environmental metrics but weak governance is read as a flag — the data may be questionable. A company with strong governance and developing environmental metrics is read as credible — the progress is verifiable.
The 3 Pillars of ESG
Successful companies historically focused on people, processes, and products. After Covid-19, consumers, societies, and communities have become more health-conscious, eco-conscious, and focused on human rights. ESG provides the modern framework for building long-term strategy that earns trust, optimizes operations, generates revenue, and achieves sustainability.
Environment
The environment is the most widely-targeted ESG pillar. Unlike social and governance issues, environmental performance has cutting-edge measurement systems available. Regardless of industry, companies can measure energy consumption, water usage, and greenhouse gas emissions — and implement viable solutions including eco-friendly materials sourcing and ecological footprint reduction. The pillar covers water consumption, GHG emissions, energy consumption, renewable energy usage, product carbon footprint, and packaging/waste.
Social
The social pillar is harder to measure because it deals with people and their viewpoints. People's opinions shift over time, making consistent measurement challenging. The pillar requires companies to acknowledge stakeholders, employees, investors, and customers — and have those groups accept company business strategy, operations, and social practices. Common social metrics include human rights, ethnic diversity, equity and inclusion, data privacy, community investment, and access to career development.
Governance
The governance pillar focuses on administrative policies, programs, and practices. Governance is all about trust: if you run a business and want funds for operational excellence, the foundational question is "can an investor trust this company?" The pillar emphasizes establishment of independent boards, assurance of shareholder rights, fair wage gaps and transparent policies, and optimal/justifiable executive compensation.
ESG Reporting Frameworks for Investor Disclosure
Three specialized frameworks address common investor disclosure needs — alongside the broader GRI, SASB, and TCFD frameworks that handle most general ESG reporting. Each serves a specific investor information requirement:
Carbon Disclosure Project
Requires disclosure of non-financial data: greenhouse gas emissions, carbon footprint, environmental performance, forest health, water security. Uses industry peers as benchmark, scores companies publicly.
Dow Jones Sustainability Indices
Building-specific framework involving subscription-based surveys of building-related ESG information, data, assets, and publicly available portfolios. Widely used for real estate disclosure.
Global Real Estate Industry Benchmark
Disclosure framework specifically for buildings. Requires voluntary disclosure of building-related ESG data with publicly available results. The standard benchmark for real estate ESG performance.
For broader ESG reporting beyond these specialized frameworks, see our companion guide on ESG reporting and transparency covering GRI, SASB, TCFD, and EcoVadis.
The Legal Risk of Poor ESG Performance
Companies failing to meet ESG commitments face severe consequences — including direct legal liability. Climate-related litigation has emerged as a significant material risk, with data confirming the scale of the threat:
According to the London School of Economics, climate change cases with litigation reached 1,800+ across 40 countries during the Covid-19 pandemic — with 58 cases in Europe in addition to the US, Australia, and UK numbers. The implications are substantial: numbers grow steadily, making climate-related litigation a material business risk.
Mitigating reputational risk also matters. Companies that fail to stay committed to ESG, or that attempt to greenwash credentials, experience reputation damage. Disclosing irrelevant or misleading climate change messages can severely affect a company and lead to direct liabilities — making credible ESG performance and accurate disclosure non-negotiable.
How GPSI Prepares Companies for ESG-Focused Investors
GPSI's ESG specialists help companies build the infrastructure investors expect: materiality assessments, framework alignment (GRI, SASB, TCFD, CDP, EcoVadis), governance structures, KPI definition, reporting workflows, and proactive investor engagement strategies. Our work supports both companies preparing for ESG-focused funding rounds and those building defensible long-term ESG performance.
For related guidance, see our companion articles on ESG reporting and transparency, implementing an ESG roadmap, and working with ESG consultants.
Final Words
ESG is equally crucial for investors, shareholders, companies, customers, and communities. Whether you're an investor performing due diligence or a business owner preparing for funding rounds, a holistic view of ESG requirements is essential to streamlining operations, accessing capital, and achieving sustainable value.
The $330B+ in ESG funds, 1,800+ climate cases globally, and growing regulatory pressure all point the same direction: ESG performance now determines who gets funded, on what terms, and with what level of investor scrutiny. Companies that build credible ESG infrastructure now compound the advantage; those that delay pay the rising cost of capital and the growing cost of inaction.
Frequently Asked Questions
How does ESG impact business investments and funding?
ESG directly impacts business investments and funding through five mechanisms: investors increasingly factor ESG criteria into capital allocation decisions; companies with strong ESG performance are perceived as lower risk and more stable for long-term investment; ESG data provides investors a more holistic view of business operations and risk; ESG-focused funds and sustainability-linked financing options expand the capital pool for qualifying companies; and regulatory expansion is making ESG disclosure mandatory in many jurisdictions. According to Harvard research, investors and businesses already manage over $330 billion in ESG funds.
What ESG questions do investors ask before funding a business?
Investors ask five core ESG questions before funding decisions: how can I have a consolidated view of portfolio companies' ESG performance; how can I reduce my ESG-related risk exposure; how can I influence ESG performance improvements in portfolio companies; what are the industry best practices on ESG; and which reporting framework or standard should be used to ensure adequate disclosure based on current and future regulations. Companies seeking investment should prepare clear, data-backed answers to each.
Which ESG factor is most important to investors?
Governance is widely considered the most important ESG factor to investors. Corporate governance following recognized standards builds trust, ensures operational transparency and accountability, and demonstrates the company's ability to manage long-term risk. There's a strong correlation between governance performance and broader ESG risk management at the corporate level. Investors view governance as foundational — without it, environmental and social commitments lack credibility.
What are the three pillars of ESG?
The three pillars of ESG are Environmental, Social, and Governance. Environmental covers water consumption, greenhouse gas emissions, energy consumption, renewable energy usage, product carbon footprint, and packaging/waste. Social covers human rights, ethnic diversity, equity and inclusion, data privacy, investment in communities, and access to career development. Governance covers establishment of independent boards, shareholder rights, fair wages and transparent policies, and justifiable executive compensation.
What ESG reporting frameworks should companies use for investor disclosure?
Three frameworks are widely used for ESG investor disclosure: the Carbon Disclosure Project (CDP) requires companies to disclose non-financial data including greenhouse gas emissions, carbon footprint, environmental performance, forest health, and water security; the Dow Jones Sustainability Indices (DJSI) involves subscription-based surveys of building-related ESG information; and the Global Real Estate Industry Benchmark (GRESB) requires voluntary disclosure of building-related ESG data with publicly available results. GRI, SASB, and TCFD frameworks are also widely used for broader ESG reporting.
How can investors reduce ESG-related risk exposure?
Investors reduce ESG-related risk exposure through four practices: examining portfolio companies' climate change preparation and response strategies, since climate is the largest ESG risk; analyzing social factors including employee treatment, labour practices, product recalls, and stakeholder relationships; evaluating governance factors covering board structure, ethics, transparent communications, anti-corruption, and policy compliance; and using real-time data, AI, predictive modeling, and industry benchmarking to track progress and perform peer comparisons across the portfolio.
What is the legal risk of poor ESG performance?
Poor ESG performance carries substantial legal risk. According to the London School of Economics, over 1,800 climate change cases involving litigation have been filed in 40 countries — including 1,387 cases in the United States, 115 in Australia, 73 in the United Kingdom, and 58 across Europe. The numbers grow steadily, making climate-related litigation a material business risk. Disclosing irrelevant or misleading messages about climate change can severely affect a company and lead to direct liabilities.
How do investors evaluate a company's ESG profile?
Investors evaluate ESG profiles through three factor categories: likelihood of adverse events — estimating probability of regulatory changes, natural disasters, or environmental events affecting performance; impact of specific events — assessing whether the business model aligns with ESG requirements and how the company manages carbon tax, climate regulations, and compliance; and shareholder communication and engagement — reviewing how the company interacts with communities, employees, and customers, and whether it understands ESG risk perception and brand impact.
Build ESG Infrastructure Investors Trust
GPSI's bilingual ESG specialists prepare companies for ESG-focused investor scrutiny — materiality assessments, governance structures, framework alignment, and reporting workflows that meet capital allocation standards.
Connect With Our ESG Team
