What is ESG and why is it important?
By: Amanda Phagan, Edited by: Valerie Black
Published: April 17, 2025
If you've ever worked at a corporation or viewed an investor report, you've probably heard the term "ESG" thrown around. This simple acronym represents a set of not-so-simple ideologies that define how companies address modern challenges like climate change, resource management, human rights, ethics, and compliance.
Learn more about ESG and its significance in our guide.
Environmental, social, and governance (ESG) defined
ESG stands for environmental, social, and governance. 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 protecting the environment, companies and consumers leaned into "socially responsible investing" (SRI) to demonstrate their values.
Now, values-driven business is more popular than ever. In 2022, more than 90% of S&P 500 companies published ESG reports, according to the management consulting firm McKinsey & Company. This represents a significant public interest in the topics that fall 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
How ESG's three pillars promote sustainability
A robust ESG strategy can improve an organization's public perception and demonstrate sustainability, fairness, and ethical leadership — which are increasingly important to consumers and employees in a rapidly changing world. Companies may approach the three pillars of ESG in the following ways:
Environmental
- What it may involve: Measuring annual carbon emissions, hiring a waste management team, implementing a recycling system, and incentivizing employees to carpool and/or use public transit for commuting
- 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
- What it may involve: Enforcing fair and equitable employment practices, giving back to the community, maintaining a diverse workforce, and creating affinity groups for employees
- Real-world example: Salesforce dedicates 1% of its time, 1% of its equity, and 1% of its product to philanthropic community support.
Governance
- What it may involve: Clearly communicating to both shareholders and employees, capping executive salaries, ensuring supply chain transparency, and hiring external analysts
- Real-world example: Outdoor clothing company Patagonia employs a Social and Environmental Responsibility team that can "veto" the company's decision to work with a new factory if it doesn't align with the team's social and environmental values.
In many cases, the three pillars of ESG overlap — environmental initiatives may involve elements of governance, and so on. Most successful ESG strategies include research, planning, and execution in all three areas, which align with broader company values or Sustainable Development Goals (SDGs).
Stakeholders vs. shareholders
All shareholders are stakeholders, but not all stakeholders are shareholders. Stakeholders include anyone with a stake in an organization's success, such as employees, partners, investors, and company leaders. Shareholders are people who have financially invested in a company.
What are the benefits of ESG in business?
The ultimate purpose of ESG is to ensure businesses play an active role in making the world safer, healthier, and more equitable. With rapid climate change, geopolitical unrest, and social injustices becoming more prominent globally, stakeholders increasingly demand accountability and transparency from businesses.
The benefits of an ESG strategy include:
ESG benefits for organizations
- Increased profit: According to McKinsey & Company, around 70% of more than 2,000 academic studies have found that higher ESG scores are connected to higher financial returns.
- Greater investment interest: McKinsey & Company cite that global sustainable investment tops $30 trillion, which is 68% higher than in 2014 and 10 times higher than in 2004.
- Cost reduction: Investing in ESG initiatives like lowering water consumption and reducing energy usage can translate into lower facilities costs.
ESG benefits for stakeholders
- Purpose-driven work: According to Gallup, a sense of purpose at work was a top driver of employee engagement and satisfaction in 2020.
- Community improvements: An organization's philanthropic involvement can help vulnerable communities and boost the public's perception of the company.
- A conduit for positive change: Companies with ESG policies may have the capital to effect change that stakeholders want to see, but can't always scale as individuals.
Are there drawbacks to the ESG framework?
Organizations that invest time, energy, and capital in ESG efforts generally experience more benefits than drawbacks. However, creating and implementing an ESG strategy can pose difficulties, including:
- Reporting issues: According to a 2025 Workiva and PwC study, 85% of the 300 executives surveyed feel that their companies may not have the right technology to meet ESG reporting requirements.
- A mismatch between words and actions: If a company puts more energy into articulating and promoting its ESG intentions than implementing them, it may be accused of "greenwashing," which could negatively impact its perception and profits.
- A focus on shareholders above all else: For climate scientists and others who dedicate their time to environmental and social causes, ESG can be perceived as a way to please shareholders rather than protect the planet.
Those tasked with creating and implementing an ESG strategy can help avoid these pitfalls by investing in robust reporting resources, setting achievable goals, and ensuring follow-through on ESG goals.
Why understanding ESG is important
Whether you're a C-suite professional, aspiring executive, entrepreneur, or corporate employee interested in carving out a sustainability niche for yourself, understanding ESG is a critical part of doing business today. Even as acronyms and corporate "buzzwords" fall in and out of vogue, stakeholders will likely always care about companies' transparency and impact on the world.
Understanding factors that influence ESG may also be important in the following roles, with salary and job outlook data provided by the Bureau of Labor Statistics (BLS):
Find programs that meet your professional development goals
ESG is one of many frameworks that today's business professionals should understand. Enroll in an executive education program focused on sustainability or business strategy to ensure you're ready for what's next.