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ESG Pillars Framework

Sustainable Development, 2024

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Step 1: MEREC

Set weights for ESG pillars and subcomponents

GoalWhich ESG factors matter most?

  1. 1

    Collect ESG data

    Gather ESG scores for firms across Environmental, Social, and Governance indicators.

  2. 2

    Measure impact

    Remove one pillar at a time and measure the change in overall ESG performance.

  3. 3

    Compute weights

    Convert the impact into weights. Bigger impact equals higher weight.

  4. 4

    Rank importance

    Rank pillars and subcomponents by their calculated weights.

Example ESG Scores
Firm Environmental (E) Social (S) Governance (G)
Firm A 90 70 80
Firm B 40 75 85
Firm C 60 65 90
Impact of Removing Each Pillar
Pillar Removed Change in Overall Score / Ranking
Environmental (E) Large
Social (S) Small
Governance (G) Medium
Example MEREC Weights
Pillar Weight
Environmental (E) 0.50
Governance (G) 0.30
Social (S) 0.20

Output of Step 1: Weights for ESG pillars and subcomponents.

Step 2: K-means Clustering

Group similar firms using weighted ESG profiles

GoalWhich firms are similar to each other?

  1. 1

    Create weighted ESG profiles

    Apply the MEREC weights from Step 1 to compute a weighted ESG score for each firm.

  2. 2

    Run K-means

    Choose K and let the algorithm group firms with similar weighted ESG profiles.

  3. 3

    Get clusters

    Firms in the same cluster have similar ESG patterns.

  4. 4

    Compare within clusters

    Use clusters as peer groups for fair comparison and better decisions.

Example Weighted ESG Scores
Firm E (0.50) S (0.20) G (0.30) Weighted Score
Firm A 90 70 80 83.0
Firm B 40 75 85 62.5
Firm C 60 65 90 70.0
Example Clusters (K = 3)
  • Strong overall ESG
  • Governance-strong, moderate overall
  • Lower overall ESG
Example Cluster Results
Cluster Firms Meaning
Cluster 1 Firm A, Firm B Strong overall ESG
Cluster 2 Firm C, Firm D Governance-strong, moderate overall
Cluster 3 Firm E, Firm F Lower overall ESG

Output of Step 2: Groups of similar firms based on their ESG profiles.

Industry Comparison Demo

Illustrative ESG importance

Illustrative demo values, not the live paper dataset.

Illustrative demo values

Environmental
44%
Social
28%
Governance
28%

In Brief

The framework in three ideas

What the paper asks

Which ESG pillars matter most for sustainability performance? The framework avoids assuming that Environmental, Social, and Governance factors should always receive equal weight.

Why the framework matters

ESG priorities can differ by firm, industry, and peer group. The method helps make those differences visible and easier to compare.

Who can use it

Researchers, investors, managers, and policymakers can use the framework to discuss ESG materiality. It turns a broad ESG score into a more targeted decision tool.

FAQ

Expandable details

Why not weight E, S, and G equally?

Equal weights are simple, but they can hide industry and firm differences. The framework estimates which ESG dimensions appear more important in context.

What does MEREC do?

MEREC ranks criteria by estimating how much the assessment changes when each criterion is removed.

Why use K-means clustering?

K-means groups similar firms or industries so ESG priorities can be compared against more meaningful peer sets.