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What is ESG and why is it important?

ESG stands for environmental, social, and governance, a framework used to evaluate a company's environmental impact, social responsibility, and governance practices. Build ESG knowledge with edX.

By: Amanda Phagan, Edited by: Gabriela Pérez Jordán

Last updated: April 13, 2026

Key takeaways

  • ESG, short for environmental, social, and governance, is a framework for assessing how companies manage sustainability, social impact, and internal oversight.
  • edX helps professionals build ESG knowledge through executive education in sustainability, sustainable finance, supply chains, and business strategy.
  • ESG-related roles include compliance officers at $78,420 with 3% growth, HR managers at $140,030 with 5% growth, and management analysts at $101,190 with 9% growth, according to the BLS.

What does ESG stand for?

If you've ever worked at a corporation or viewed an investor report, you've likely encountered ESG. The term refers to a framework companies use to assess issues like climate change, resource management, human rights, ethics, and compliance.

While the term was coined in 2004 by the United Nations Global Compact, the concept of corporate responsibility dates back to the 1970s. Spurred on by increased awareness of sociopolitical upheaval and environmental protection, companies and consumers leaned into "socially responsible investing" (SRI) to reflect their values.

By 2022, more than 90% of S&P 500 companies published ESG reports in some form, according to McKinsey & Company. This represents a significant public interest in topics under environmental, social, and governance.

But what do these terms mean in a corporate context?

  • Environmental: How an organization impacts the planet
  • Social: How an organization impacts people both internally and externally
  • Governance: How an organization implements and communicates about processes

What are ESG factors?

ESG factors are the standards companies use to assess their environmental impact, social responsibility, and governance practices. Together, they help translate ESG goals into practices for identifying risks, setting priorities, and measuring progress over time.

Environmental ESG factors
Description
Examples of ESG factors include measuring carbon emissions, improving energy efficiency, implementing recycling systems, and promoting sustainable transportation options such as carpooling or public transit.
Real-world example
Microsoft announced in 2020 that it plans to be "water-positive" by 2030, replenishing more water than it consumes across its global operations.
Social ESG factors
Description
Social ESG factors include fair and equitable employment practices, diversity and inclusion initiatives, community engagement, and employee support programs.
Real-world example
Salesforce dedicates 1% of its time, equity, and product to philanthropic community support.
Governance ESG factors
Description
Governance ESG factors include corporate transparency, executive compensation policies, board oversight, and supply chain accountability.
Real-world example
Patagonia empowers its Social and Environmental Responsibility team to veto factory partnerships that don't meet its environmental and social standards.

In practice, ESG factors often overlap, and effective strategies include research, planning, and execution in all three areas, which align with broader company values or Sustainable Development Goals (SDGs).


Why is ESG important in business?

As Earth Day highlights each April, ESG provides organizations with a way to demonstrate how they manage their environmental and social impacts year-round. A grounded ESG strategy can help organizations improve operational efficiency, strengthen investor confidence, and build trust with employees, customers, and communities.

Benefits of ESG can include:

  • Increased profit: McKinsey reports that around 70% of more than 2,000 academic studies have found that higher ESG scores are connected to higher financial returns.
  • Cost reduction: ESG efforts such as reducing energy use and water consumption can help lower operating costs.
  • Community improvements: Companies with ESG policies may have the resources to advance environmental and social initiatives beyond what individuals can usually do alone.

ESG challenges and criticisms

Organizations that invest in ESG efforts generally experience more benefits than drawbacks. However, creating and implementing an ESG strategy can pose difficulties, including:

  • Companies may lack the tools needed to meet ESG reporting requirements.
  • If a company promotes its ESG intentions but fails to implement them, it may face accusations of greenwashing.
  • In some cases, ESG can be perceived as a way to please shareholders rather than advance environmental or social goals.

Organizations can avoid these pitfalls by improving reporting resources, setting realistic goals, and ensuring follow-through on ESG goals.

ESG careers and jobs: Roles that use ESG knowledge

Understanding ESG may also be important in the following roles, with salary and job outlook data provided by the Bureau of Labor Statistics (BLS):

Compliance officers

Compliance officers ensure that organizations follow environmental, health, and safety regulations. Their duties include inspecting, reporting, and preparing recommendations for meeting standards.

  • Median annual salary (May 2024): $78,420
  • Projected job growth (2024-34): 3%


Learn ESG skills with online courses and programs

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Outcomes-based design
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Real-world impact
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Dedicated support
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Frequently asked questions about ESG

How is ESG measured?

ESG is measured by evaluating how an organization performs across environmental, social, and governance areas. This process often combines quantitative data with internal policies, disclosures, and third-party reporting standards to assess how a company manages risk, accountability, and impact.

Why is ESG important?

ESG plays a key role in organizational profitability, employee engagement, public image, and investment interest. It encompasses an organization's stance on sustainability, equity, and transparency, which can impact stakeholder behavior in various ways.

How is corporate ESG measured?

Corporate ESG can be measured in many different ways, including carbon emissions, board member diversity, gallons of water used, the percentage of employees with disabilities, and money donated to social causes. Many companies include these metrics — as well as descriptions of their efforts in these areas — in an annual report.

Where can you find a company's ESG report?

A company's ESG report can typically be found on its website. Website navigation varies, but most corporations have an "investor relations" section that contains information on their ESG efforts, if applicable.

What is ESG investing?

ESG investing is a sustainable finance investment strategy that prioritizes companies with robust environmental, social, and governance policies in place. This often involves screening companies against ESG criteria before making an investment decision.

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