ENVIRONMENTAL, SOCIAL, AND GOVERNANCE
Back to GlossaryDefinition
Criteria or a set of standards for a company’s operations that socially conscious investors use to screen potential investments.
Summary
Environmental, Social, and Governance (ESG) is a framework used to evaluate companies and investments based on three key criteria: Environmental factors (climate impact, resource use, pollution), Social factors (employee treatment, community relations, diversity), and Governance factors (leadership accountability, executive compensation, shareholder rights). ESG helps investors and stakeholders assess how sustainable and responsible a company's practices are beyond just financial performance.
Usage Context
Understanding ESG is crucial when studying modern business ethics, sustainable finance, investment strategies, corporate governance, and regulatory compliance. It's particularly important for analyzing how businesses balance profit with social and environmental responsibility.
Common Confusions
- Thinking ESG is just about environmental issues when it includes social and governance factors
- Confusing ESG with philanthropy or charitable giving
- Believing ESG is purely voluntary when regulations increasingly require ESG reporting
- Assuming all ESG investments sacrifice financial returns
- Thinking ESG criteria are standardized when they can vary significantly between rating agencies
