Environmental, Social and Governance or ESG is the acronym that everyone loves to hate and yet no one can define. So what is it?
ESG can be difficult to understand, because it really is difficult to define:
Is it an animal, vegetable or mineral?
Person, place or thing?
Is it a noun (report or framework), verb (process), probably not an adjective, that’s a tough one.
Is it a process? Or an end product? Or both?
A way of thinking about risks and opportunities (internal and external)?
All (or some) of the above?
I work a lot with students at both the graduate and undergraduate levels. And as ESG steadily becomes a larger part of virtually all industries, they need to have a baseline understanding. But it can be (understandably) really difficult for audiences with little to no background or context to understand ESG - something that is inherently multi-faceted and multi-disciplinary. You have to pull a lot of themes together for it to make sense, and that can require the lens of experience.
Heck, I have often joke that if you asked ten different ESG practitioners to define ESG, you would get ten different definitions, and none of them would be wrong (by the way, I asked ChatGPT to define ESG, and here’s what it said).
ESG is tough for all of us to define, but particularly tough for professionals who are just starting out on their career path, because ESG touches so many disciplines disciplines: sustainability, finance, risk management, climate change, law and policy, and on, and on, and on…. If you don’t yet have the background, it’s really hard.
So what is ESG?
I generally think of ESG as a process: collecting, analyzing and sharing a variety of metrics that loosely fall into three “buckets” of Environmental, Social and Governance. And hopefully improving on those metrics (and your process) over time. Generally, this information is shared in the form of a report (or a collection of reports and required filings, depending on the circumstances).
We currently lack a single standard to look to; which means we don’t (yet) have a common language. And I hate to be a skeptic, but I just don’t see how the SEC’s forthcoming regulations will provide much clarity. They may provide some structure, and a floor, but that’s about it.
So when I try to explain ESG to my students, the best I can come up with is that it is a process. What do you think? Drop a (respectful) comment below…