Glossary term
Environmental, Social and Governance (ESG)
Subject: Sustainability and ESG, ESG Frameworks, Standards and Disclosure
ESG groups the environmental, social and governance factors that affect how a company operates and what risks and impacts it creates, and that investors, lenders and regulators weigh alongside financial results.
Explanation
Environmental factors cover areas such as emissions, energy, water, waste and biodiversity. Social factors cover people: employees, customers, communities and workers in the supply chain, including health and safety, pay and human rights. Governance covers how the company is run, including the board, executive pay, ethics, controls and shareholder rights. The label began in investment and is now used across lending, reporting and regulation. Practitioners meet it as a set of risks to manage, metrics to disclose and standards to follow, and it is sometimes used loosely as a stand-in for sustainability. It is not one standard: definitions, scope and priorities vary by region and by user, and the term has become politically contested in some countries. In practice, a lender or investor uses the three headings as a checklist to find risks that a balance sheet alone would hide.
Example
A bank’s credit team reviews a loan to a mining company. They look at tailings dam safety and water use (environmental), community relocation and worker injuries (social), and board independence and anti-bribery controls (governance). The findings change the loan conditions and add a requirement for annual reporting on all three.
Not to be confused with
- Corporate Social Responsibility (CSR)
- CSR is a company’s voluntary contribution to society. ESG is a set of factors measured and reported for investors and regulators.