esm are treated as masters too, whether they have the flag set or not. For newer games, files with the extension. For games before Fallout 4, the only thing that mattered was a flag inside the file called the ESM flag. ESM (case-sensitive) or ESM-flagged file refers to any file that the game treats as a master.
It can also refer to those who are involved in the creation of utilities that are used by mod authors and/or users.