ESG is an acronym that stands for environmental, social, and governance.

1. Environmental

Environmental factors refer to an organization’s environmental impact(s) and risk management practices. These include direct and indirect greenhouse gas emissions, management’s stewardship over natural resources, and the firm’s overall resiliency against physical climate risks (like climate change, flooding, and fires).

2. Social

The social pillar refers to an organization’s relationships with stakeholders. Examples of factors that a firm may be measured against include human capital management (HCM) metrics (like fair wages and employee engagement) but also an organization’s impact on the communities in which it operates.

A hallmark of ESG is how social impact expectations have extended outside the walls of the company and to supply chain partners, particularly those in developing economies where environmental and labor standards may be less robust.

3. Governance

Corporate governance refers to how an organization is led and managed. ESG analysts will seek to understand better how leadership’s incentives are aligned with stakeholder expectations, how shareholder rights are viewed and honored, and what types of internal controls exist to promote transparency and accountability on the part of leadership.