What Is ESG?

ESG is an acronym that stands for environmental, social, and governance. The three topics describe the various activities that companies can do to be responsible for the environment and greater community. ESG is relevant for businesses that want to stay competitive, investors who want to ensure the financial products they buy support responsible capitalism, and consumers who want their purchases to reflect their values.

Read on to answer the question, what is ESG? Learn more about ESG investing, ESG ratings, why it’s important, and potential careers connected to this intersection of values. 

What is ESG?

ESG, or environmental, social, and governance, is a framework for discussing how companies or other organizations can be socially and environmentally responsible and how they comply with regulations and other forms of governance. ESG ratings measure ESG as a metric, and ESG investing is a market strategy that prioritizes socially responsible companies. 

Companies can implement different policies to meet ESG criteria, such as reducing their carbon footprint or embracing diversity in the workplace. Developing an ESG strategy is one way to make your company more attractive to potential investors, tell a story about your brand to your customers, or attract and retain talented employees. 

Let’s take a closer look at each part of ESG: 

• Environmental: The environmental category includes the impact of a company on the planet through its carbon footprint, how it uses natural resources, and the risks the business faces due to a changing climate. The company's policies or measures to commit to sustainability and reduce their environmental impact fall under this category. 

• Social: This part of ESG refers to how a company treats its employees and invests in the community. It can address issues among your staff, such as equal pay, diversity and inclusion, employee morale, and company culture. 

• Governance: This category refers to the company's governance, such as the leadership and C-suite, and how the company complies with local and national government policies. Some investors use compliance as a metric for measuring the value of an investment. It also includes internal governance factors like executive pay ratio and internal company culture.

Why is ESG important?

ESG is more than just a buzzword: it’s a metric that companies will need to pay attention to to stay competitive in the future. Here are a few of the reasons that ESG is important:

• Push innovation: Looking for more sustainable solutions can lead to industry innovation as you find new ways to approach doing business that help protect the environment. 

• Attract conscious consumers: Investing in ESG allows you to tell a story about the values that matter to your brand. In turn, you can attract socially conscious customers who share your values and want their consumer spending to reflect the ideas that are important to them. 

• Attract investors: ESG speaks to the metrics investors care about. When your company focuses on improving its ESG, it may become a more attractive investment. 

• Attract skilled employees: When you prioritize issues like equal pay, company culture, and diversity and inclusion, more people may express interest in joining your team, allowing you to choose the best. If your employees can see their personal values demonstrated in their workplace, they may show more motivation and engagement.

• Changing world: As climate change affects the entire world, companies look for ways to adapt their business models to sustainable practices that can withstand potential resource shortages in the future.

Who uses ESG?

ESG impacts all industries because environmental, social, and governance issues are not specific to any one sector. Below, you’ll find examples of how ESG affects industries as diverse as aerospace and defense, automotive, construction, and retail. 

• Aerospace and defense: One cause of worldwide carbon output is emissions associated with airplanes, which demand innovation in the form of more efficient fuels and improved aircraft design. In national defense, rare minerals required for weapons and aircraft often originate in countries with objectionable human rights practices. ESG is a useful framework for discussing these issues.

• Automotive: ESG in the automotive industry involves innovation and discussion of electric vehicles, responsibly sourced raw materials, working conditions for employees, and adapting to regulations.

• Construction: Construction materials, the processes that builders use to create houses and industrial buildings, and the way that materials are extracted all contribute to the environmental impact of the construction industry. The construction industry is also struggling to retain and attract skilled workers. 

• Retail: Younger shoppers are sometimes more socially aware consumers and retail companies feel pressure from the customer base to adapt. ESG issues in retail stem from human rights issues in the manufacturing and supply chain, exaggerated marketing claims surrounding environmental work, and high emissions from shipping retail goods. 

Careers in ESG

Environmental, social, and governance issues are relatively new ideas when it comes to measuring the potential value of a company or investment product. Companies are creating new positions due to increased pressure to address ESG concerns. Three potential careers to explore where you will interface with ESG issues are financial consulting, management consulting, and portfolio management.

Financial consultant

Average annual salary in the US: $95,581 [1]

Job outlook (projected growth from 2022 to 2032): 13 percent [2]

Education requirements: To become a financial consultant, you will likely need a bachelor’s degree in finance, accounting, business, or a related field. You may also need to earn and maintain licensing or certification, depending on the type and location of your work. 

As a financial consultant or advisor, you will help others make financial decisions by giving them the information they need to make informed investments. You may handle investments directly or you may work on projects like mergers and acquisitions or setting company goals. In this role, you may use ESG to help evaluate investment opportunities.

Management consultant

Average annual salary in the US: 80,859 [3]

Job outlook (projected growth from 2022 to 2032): 10 percent [4]

Education requirements: To become a management consultant, you typically need to earn a bachelor’s degree in business, accounting, or finance. A master’s degree is also common.

Read more: What Is a Master's in Finance?

As a management consultant, you will work with companies to set goals, review and optimize business policies, improve company operations, and identify problems and corresponding solutions. You may specialize in a particular industry or a certain area of business. In this role, you may help companies understand their current ESG rating and identify opportunities to improve their rank on ESG criteria.

Portfolio manager

Average annual salary in the US: $115,260 [5]

Job outlook (projected growth from 2022 to 2032): 16 percent [6]

Education requirements: Typically, portfolio managers have bachelor’s degrees in accounting and finance. Depending on the work you plan to do, you may need to pursue additional certifications such as CPM (Certified Portfolio Manager).

As a portfolio or investment manager, you will build and maintain a portfolio of investments for your clients. You will analyze investment products and stock performance to determine the best investment for your clients to meet their goals. In this role, you can work as a solo practitioner or as part of a larger company. Portfolio managers may use ESG to evaluate the performance of investment products.

Limitations of ESG

While you can see the many reasons why ESG is important to companies, you’ll find challenges to implement ESG initiatives as well, such as:

• Resistance to cultural change: You can help your team embrace ESG initiatives by ensuring that your actions represent your values and educating your team members on the importance of ESG cultural changes.

• Poor data: When it comes to using ESG as an actionable metric, a lack of quality data or consistency between data sources may limit your options.

• Broad definitions: Environmental, social, and governance issues are relevant to every industry and, therefore, do not have a one-size-fits-all approach.

Learn more with Coursera

As business models adapt to changing social norms, they need people to help them implement initiatives to embrace environmental, social, and governance issues. To take the next step toward one of these careers, you can enroll in The Materiality of ESG Factors Specialization, offered by the University of Pennsylvania on Coursera. This four-course series covers ESG topics, including ESG investment strategies, social activism, climate change, and more.