ESG stands for Environmental Social and Governance, and refers to the three key factors when measuring the sustainability and ethical impact of an investment in a business or company. Most socially responsible investors check companies out using ESG criteria to screen investments.
It is a generic term used in capital markets and commonly used by investors to evaluate the behavior of companies, as well as determining their future financial performance.
The Environmental Social and Governance factors are a subset of non-financial performance indicators which include ethical, sustainable and corporate government issues such as making sure there are systems in place to ensure accountability and managing the corporation’s carbon footprint.
The number of investment funds that incorporate ESG factors has been growing rapidly since the beginning of this decade, and is expected to continue rising significantly over the decade to come.
ESG’s three central factors are:
Environmental criteria, which examines how a business performs as a steward of our natural environment, focusing on:
- waste and pollution
- resource depletion
- greenhouse gas emission
- climate change
Social criteria, which looks at how the company treats people, and concentrates on:
- employee relations & diversity
- working conditions, including child labor and slavery
- local communities; seeks explicitly to fund projects or institutions that will serve poor and underserved communities globally
- health and safety
Governance criteria, which examines how a corporation polices itself – how the company is governed, and focuses on:
- tax strategy
- executive remuneration
- donations and political lobbying
- corruption and bribery
- board diversity and structure
If you are an investor and would like to buy ESG-screened securities you should consider socially responsible mutual funds and exchange-traded funds.
Experts say that what constitutes an appropriate set of ESG criteria is subjective – it depends on what your priorities are – so you will need to do the research yourself if you really want to seek out investments that precisely match your own values.
ESG and the alternative investment world
ESG standards are gradually becoming a significant part of the alternative investment world. ESG issues are not only important when measuring the sustainability of the non-financial impacts of investments – they may also have a material impact on the return profile and long-term risk of investment portfolios.
A recent study found that investors who choose ESG-screened investments receive a ‘double dividend’ in the form of lower risk plus a better **rate of return.
Source: Market Business News