ESG stands for Environmental, Social, and Governance, and refers to the three central factors in measuring the sustainability and ethical impact of an investment in a company or business. These criteria help to better determine the future financial performance of companies (return and risk).
- Environmental criteria consider how a company performs as a steward of nature.
- Social criteriaexamine how it manages relationships with employees, suppliers, customers, and the communities where it operates.
- Governance involves a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
Corporate social responsibility is a hard-edged business decision. Not because it is a nice thing to do or because people are forcing us to do it… because it is good for our business.
Niall Fitzerald, Former CEO, Unilever
In Simpler Terms
When you decide to buy a product, let’s say, coffee, you might choose a brand that not only makes great coffee but also sources its beans ethically, supports fair labor practices, and uses eco-friendly packaging. This is similar to how investors use ESG criteria to choose companies.
The concept of ESG was first officially introduced in a 2005 landmark study titled “Who Cares Wins.” The study made the case that integrating ESG factors into capital markets could help enhance returns and better align investors with broader objectives of society.
While the importance of ESG is growing, the challenge lies in the variability of how it is measured and reported. There is no universal standard for what constitutes good ESG performance, which can lead to inconsistencies and “greenwashing”—where companies give a misleading impression of their environmental efforts.
