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ESG stands for environmental, social and governance. It is a broad framework for considering how a company or investment relates to environmental issues, people and society, and the way an organization is run. ESG is not one universal checklist, score, or guarantee that an investment is sustainable; its meaning depends on the criteria and method being used.
What do environmental, social and governance cover?
The three ESG pillars group different kinds of considerations. Their boundaries can overlap: for example, a governance process may shape how a company handles environmental risks or treats workers.
| Pillar | What it considers | Examples |
|---|---|---|
| Environmental | A company’s effects on the environment, and environmental risks and opportunities it faces. | Climate change mitigation and adaptation, biodiversity, pollution prevention, and the circular economy. European Commission overview of sustainable finance |
| Social | A company’s relationship with people and society. | Inequality, inclusion, labor relations, human rights, and investment in people, skills, and communities. European Commission overview of sustainable finance |
| Governance | How a company or institution is directed and managed. | Management structures, employee relations, and executive compensation. SEC Investor.gov explanation of ESG investing |
How is ESG used in investing?
Investors may consider ESG factors alongside other information when evaluating a company, financial instrument, or portfolio. An investment can incorporate ESG considerations even if “ESG” is not in its name. The label alone does not tell you which factors matter most: the U.S. Securities and Exchange Commission’s Investor.gov notes that investments can weight the factors differently and focus on different criteria within each one. Read the SEC’s investor explanation.
ESG is related to sustainable investing, but the terms are not interchangeable by themselves. ESG describes categories of considerations; it does not establish that an investment is sustainable, specify a common definition of sustainability, or promise particular environmental or social outcomes.
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Why do ESG ratings differ?
An ESG rating is an assessment, not a universal measurement. The European Commission describes ratings as evaluating sustainability performance through exposure to sustainability risks and/or impacts on people and the environment. A rating may cover all three pillars, just one factor, or a narrower subfactor. It may use a financial-risk perspective, an impact perspective, or a combination, and it may rely on analyst judgment or data analysis. European Commission overview of ESG rating activities.
As a result, two ratings for the same company can differ without either being a simple error: they may be measuring different things, using different evidence, or combining factors differently. Before interpreting or comparing scores, check:
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- Which companies or financial instruments the rating covers.
- Which ESG factors and subfactors it includes.
- Whether it assesses financial risks, real-world impacts, or both.
- How the provider collects and evaluates evidence.
- How it weights and combines the factors into an overall result.
How is ESG different from a reporting standard?
ESG is a broad label. A reporting standard sets out a more specific disclosure purpose and scope, so the acronym alone does not tell readers what a company must report.
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What is changing for ESG ratings in the EU?
Regulation (EU) 2024/3005 on the transparency and integrity of ESG rating activities entered into force on 1 January 2025 and applies from 2 July 2026, according to the European Commission. It addresses transparency around ratings’ objectives and methodologies and requires relevant providers serving investors and companies in the EU to be authorised and supervised by the European Securities and Markets Authority (ESMA). The regulation’s scope and application are legal questions; check the current legal text and applicable local implementation before relying on this for compliance decisions. European Commission information on ESG rating activities.
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