Wondering what is ESG and why it keeps appearing in news, jobs and fund names? It stands for environmental, social and governance: a way to judge how a company handles risks beyond its profit figures.
This guide sits alongside our overview of what is sustainability, and shows how that bigger idea gets applied to businesses.
| Item | Value |
|---|---|
| Pillars in ESG | Three: environment, society, governance |
| Year the term was first officially used | 2004 (UN Global Compact report Who Cares Wins) |
| Year PRI emphasised ESG as an investment principle | 2006 (UN Principles for Responsible Investment) |
| EU CSRD employee threshold after reform | Over 1,000 employees |
| EU CSRD turnover threshold after reform | Over EUR 450 million net turnover |
The history comes from the Korea Exchange ESG portal and the EU thresholds from a Clifford Chance analysis. Rules and figures can change, so check the sources before you rely on them.
What the three letters stand for
ESG frames corporate sustainability and long-term growth around three core values: environment, society, and governance, according to the Korea Exchange ESG portal. Each one is a lens for asking whether a company is well run and whether it creates hidden risks.
- Environmental: the company’s footprint, such as emissions, energy use, water, waste and climate targets.
- Social: how it treats employees, customers, suppliers and local communities, including safety, pay and diversity.
- Governance: how it is run, including board structure, executive pay, audit controls, shareholder rights and ethics.
The three are meant to be read together. A firm with clean factories but weak financial controls still carries risk.
Where ESG came from
The same portal says the term “ESG” was first officially used in the 2004 report Who Cares Wins, published by the UN Global Compact. It adds that in 2006 the Principles for Responsible Investment, an alliance of international investors, emphasised ESG as an investment principle.
The idea grew out of older concepts. The portal describes ESG as the evolution and institutionalisation of sustainable management and corporate social responsibility (CSR).
How ESG is used in practice
Investors use ESG information to spot risks and opportunities that a balance sheet may not show. Companies use it to organise their own goals, supplier rules and public reports.
Typical uses include:
- Fund managers screening or weighting companies in a portfolio.
- Rating providers scoring firms from public disclosures.
- Companies setting targets and publishing sustainability reports.
- Lenders and customers asking suppliers for climate and labour data.
Environmental goals often overlap with energy choices, so our guide to types of renewable energy helps explain what a company means when it promises to switch its power supply.
ESG reporting rules in the EU
Reporting is moving from voluntary to legally required in some places. The EU’s Corporate Sustainability Reporting Directive (CSRD) is the main example, and its scope was cut back in the reform known as Omnibus I.
The Parliament adopted the agreed text on 16 December 2025, as the Clifford Chance analysis records. As of that update, the CSRD will apply to EU companies with over 1,000 employees and over EUR 450 million in net turnover. It will also apply to ultimate non-EU parent companies with over EUR 450 million in net turnover generated in the EU in both of the last two consecutive financial years, plus an EU subsidiary or branch with over EUR 200 million in net turnover in the preceding financial year.
The same analysis notes that many companies now required to report will fall out of scope. National law and timing still matter, so a business should confirm its own position.
Examples of ESG issues in everyday business
The three letters can feel abstract until you see them applied to a real company. A clothing retailer, a bank and a software firm will each face a different mix of issues.
A clothing retailer
Environmental questions centre on water use, dyes and the emissions from shipping goods. Social questions focus on factory conditions and wages across the supply chain. Governance covers how the company checks that its suppliers follow its own rules.
A bank
Social issues include fair treatment of customers, and governance includes risk controls and how pay rewards staff.
A software company
Data centres make energy and cooling the main environmental topics. Social topics include privacy, workplace culture and access to technology. Governance includes how the board oversees security and handles conflicts of interest.
Because the mix differs by sector, a sensible ESG review looks at the issues that matter most to that business, not a generic checklist.
How to read an ESG report or rating
Whether you are an employee, a customer or a small investor, you can ask a few practical questions of any ESG claim. They help you move past the headline score.
- Check what is measured. Look for actual data, such as emissions or injury rates, not only policies and intentions.
- Look for a baseline and a target date, so you can see whether progress is real.
- Find out who checked the numbers, for example an independent auditor or only the company itself.
- Read what is left out, especially the issues that matter most to the business.
Ratings from different providers use different methods and weightings. That is why the same company can score well with one provider and poorly with another.
It also helps to separate ESG risk from ESG impact. A rating may show how much a company’s profits are exposed to climate or labour risks, which is different from how much harm or good the company does in the world.
Criticism and limits of ESG
ESG is useful as a checklist of questions, but it is not a verdict on whether a company is good or bad. It cannot replace your own judgement about what matters most to you, whether that is climate, workers’ rights or honest management.
ESG has no single universal standard, so scores from different providers can disagree. A company can also look strong by disclosing a lot while changing little in practice.
Claims that overstate green credentials are a known problem. Our explainer on what is greenwashing shows how to tell real progress from marketing.
Some critics also argue that bundling three very different topics into one score hides trade-offs. Reading the underlying data, not just the headline rating, is the safer habit.
The rules are also uneven between regions. Some jurisdictions require detailed disclosure, while others leave it voluntary, so two companies reporting under different regimes may not be directly comparable.
Frequently asked questions
Is ESG the same as sustainability?
Show answer
Not quite. Sustainability is the broad goal, while ESG is a framework for measuring and managing how a company contributes to it.
Is ESG the same as CSR?
Show answer
They overlap. The Korea Exchange ESG portal describes ESG as the evolution and institutionalisation of sustainable management and CSR, so ESG is more structured and measurable.
Who created the term ESG?
Show answer
As of the Korea Exchange portal’s history page, the term was first officially used in the 2004 UN Global Compact report Who Cares Wins.
Does a high ESG score mean a company is ethical?
Show answer
No. Scores depend on the provider’s method and on what a company discloses, so treat them as one input and look at the details behind them.
