Understanding ESG: A Comprehensive Guide to Environmental, Social, and Governance Practices in Business

ESG — environmental, social and governance — has become an important consideration in business, and finance professionals increasingly need to understand it. ESG concerns how organisations manage their environmental impact, their relationships with people and society, and how they're governed. This guide explains what ESG means in business, why it matters, and its relevance to finance professionals. For related material, see our guides on corporate governance and professional development.

What does ESG mean?

ESG stands for Environmental, Social and Governance — three broad areas through which the wider impacts and practices of an organisation can be considered. The environmental dimension concerns an organisation's impact on the environment, such as its use of resources, emissions and broader environmental effects. The social dimension concerns its relationships with and impact on people and society — including employees, customers, communities and others. The governance dimension concerns how the organisation is directed and controlled, including its leadership, accountability and ethics. Together, these dimensions provide a framework for thinking about how organisations operate beyond purely financial performance — considering their wider impacts, responsibilities and practices. ESG has become an increasingly prominent lens through which businesses, investors and other stakeholders consider organisations.

Why ESG matters in business

ESG has grown in importance for a number of reasons. Many investors and stakeholders increasingly consider ESG factors when assessing organisations, viewing them as relevant to risk, performance and value. There is growing regulatory and reporting attention on ESG matters in many places, with expectations around disclosure developing. Customers, employees and communities increasingly care about how organisations behave on these dimensions. And many argue that attending to ESG factors is part of responsible, sustainable business and can be relevant to long-term success and resilience. It's worth noting that ESG is also a subject of ongoing discussion and differing views — people debate aspects of how it should be approached, measured and prioritised. But its prominence in business and investment is clear, which is why understanding it is increasingly important. Organisations engage with ESG to differing degrees and in different ways depending on their context and judgement.

The three dimensions in more detail

Looking at each dimension a little more closely helps clarify what ESG involves. The environmental dimension can encompass matters such as resource use, emissions, waste, and an organisation's broader environmental footprint and how it manages environmental risks and impacts. The social dimension can encompass how an organisation treats and relates to people — including matters around employees, working practices, customers, communities, and wider social impact. The governance dimension can encompass how the organisation is led and controlled — including board structures, accountability, ethics, transparency and how decisions are made. These dimensions overlap with established areas like corporate governance and connect to long-standing ideas about responsible business. Understanding the breadth of what ESG covers helps in appreciating both its scope and its relevance across many aspects of how organisations operate.

ESG and finance professionals

ESG is increasingly relevant to finance professionals for several reasons. There is growing attention on ESG-related reporting and disclosure, an area where finance professionals are often involved given their role in reporting. ESG factors can be relevant to risk management and decision-making, which finance professionals support. Investors' interest in ESG connects to areas like financial analysis and reporting. And as ESG considerations become more embedded in business, finance professionals benefit from understanding them as part of the wider context in which they work. While the specifics of ESG continue to develop — and there is ongoing debate about approaches and standards — a general understanding of what ESG is and why it matters is increasingly valuable for finance professionals. Keeping up with developments in this evolving area, including emerging reporting requirements, is worthwhile. Always check current requirements and frameworks relevant to a particular context, as these are developing.

Frequently asked questions

What does ESG stand for?

Environmental, Social and Governance — three broad dimensions for considering an organisation's wider impacts and practices beyond purely financial performance.

Why does ESG matter in business?

Because investors and stakeholders increasingly consider it, regulatory and reporting attention is growing, customers and employees care about it, and many see it as part of responsible, sustainable business — though approaches are also debated.

What do the three dimensions cover?

Environmental (impact on the environment), social (relationships with and impact on people and society), and governance (how the organisation is directed, controlled and held accountable).

Why is ESG relevant to finance professionals?

Because of growing ESG-related reporting and disclosure, its relevance to risk and decision-making, investor interest connecting to financial analysis, and its increasing presence in the business context.

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