What Is ESG (Environmental, Social & Governance)?
A neutral, attributed definition — what the term means and how supporters and critics use it.
ESG stands for Environmental, Social, and Governance — a set of criteria used to evaluate companies beyond traditional financial metrics. "Environmental" covers issues like emissions and resource use, "social" covers labor practices and community impact, and "governance" covers board structure, executive pay, and business ethics. Investors and rating firms use ESG scores to assess non-financial risks and values.
ESG grew rapidly as an investing framework in the 2010s, marketed as a way to manage long-term risk and align portfolios with certain values. It has since become politically contested: some U.S. states and officials have moved to restrict ESG considerations in public investing, while others defend it, making ESG a flashpoint in debates over the role of values in finance.
How ESG is used
Asset managers, pension funds, and rating agencies use ESG data to screen investments, build funds, and score companies. Firms report ESG metrics to attract capital and manage reputational and regulatory risk; some tie executive compensation to ESG targets.
What supporters say
Supporters argue ESG helps identify long-term risks that traditional accounting misses — such as climate exposure or governance failures — and lets investors align money with their values. They frame it as prudent risk management and transparency.
What critics say
Critics argue ESG injects political and ideological goals into investing, can breach fiduciary duty by prioritizing values over returns, and relies on inconsistent, subjective scores. Several states have passed anti-ESG laws restricting its use in public funds and contracts.
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ESG — Frequently Asked Questions
- What does ESG stand for?
- ESG stands for Environmental, Social, and Governance — three categories of criteria used to evaluate a company's practices and risks beyond its finances, often summarized in an ESG score used by investors and rating firms.
- Why is ESG controversial?
- ESG is contested because supporters see it as prudent, values-aligned risk management, while critics see it as injecting politics into investing, potentially conflicting with fiduciary duty, and relying on subjective scores. Several U.S. states have restricted ESG in public investing.