What Is Environmental, Social, and Governance (ESG)?

Sustainability has become an important business consideration in recent years, and environmental, social, and governance (commonly abbreviated as ESG) are the three primary criteria to measure a company's impact in this area. ESG is relevant for companies that want to remain competitive, investors who want to ensure the financial products they buy support responsible capitalism, and consumers who want their purchases to reflect their values.

In this article, we'll spend time discussing each of these key pillars. Afterward, if you'd like to build your knowledge in ESG, consider enrolling in the University of Pennsylvania's The Materiality of ESG Factors Specialization, where you'll learn about the set of investment approaches informed by ESG factors. 

What is ESG?

ESG—or environmental, social, and governance—is a framework for measuring the various efforts a company undertakes to be socially and environmentally responsible, and how they comply with regulations and other forms of governance. Let’s take a closer look at each part of ESG: 

• Environmental: The environmental category includes a company's impact 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 its 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.

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. 

How is ESG measured?

ESG is measured in a score, which is typically computed through ratings platforms. These tools analyze any materials the company has publicized about its ESG initiatives and how successful it is compared to industry benchmarks and competitors. To do their part, companies may opt to release ESG metrics as part of an annual report or they may release a report focused solely on ESG efforts.

Why is ESG important?

To stay competitive, companies will need to pay attention to their ESG metrics. Here are a few of the reasons that ESG is important:

• Pushing 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. 

• Attracting 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. 

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

• Attracting 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 the 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.

Which industries use ESG?

ESG impacts all industries because environmental, social, and governance issues are not specific to any one sector. However, we've outlined some of the industries where ESG can have a particularly significant impact.

• 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. 

4 ESG career paths

If you're interested in sustainability and ESG, there are a few different career paths to consider. You can either work at a company, overseeing and supporting their sustainability initiatives, or you can work in the financial industry to identify companies with strong ESG scores and make investment recommendations. Let's review the different options.

1. Sustainability analyst

Average annual salary in the US: $62,889 [1]

Job outlook (projected growth from 2023 to 2033): 7 percent [2]

Education requirements: To become a sustainability analyst, you will likely need a bachelor’s degree in environmental studies, business, or a related field. You will also likely need to develop your data analysis skills.

Sustainability analysts (sometimes called sustainability specialists) are professionals whose responsibility is to help businesses or organizations identify new ESG initiatives, ensure the success of ongoing ESG initiatives, and address any other environmental, social, or governance challenges that may result from doing business.

2. Financial advisor

Average annual salary in the US: $96,587 [3]

Job outlook (projected growth from 2022 to 2032): 17 percent [4]

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 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.

3. Management consultant

Average annual salary in the US: $126,266 [5]

Job outlook (projected growth from 2022 to 2032): 11 percent [6]

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.

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.

4. Portfolio manager

Average annual salary in the US: $94,871 [7]

Job outlook (projected growth from 2022 to 2032): 17 percent [8]

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.

Learn about ESG and sustainability on Coursera

Develop or deepen your knowledge about sustainability in general and ESG specifically with programs on Coursera.

• Identify how the ESG approach should be an essential piece of your strategy based on various factors impacting and driving value with the University of Pennsylvania's The Materiality of ESG Factors Specialization. This four-course series covers ESG topics, including ESG investment strategies, social activism, climate change, and more.

• Improve how your company or organization impacts the environment, people and communities with the University of Colorado Boulder's Become a Sustainable Business Change Agent Specialization. Over four courses, you'll learn how to make your company and the world a better place.