ESG, which stands for Environmental, Social, and Governance, highlights the aspects of a sustainable, responsible, or ethical investment.
Environmental, Social, and Governance (ESG) criteria are a set of operational requirements used by socially concerned investors to analyse possible investments. Environmental criteria assess how a corporation behaves as a steward of the environment. Social criteria look at how the company maintains connections with its workers, suppliers, consumers, and the communities in which it works. Governance is concerned with the leadership of a corporation, executive remuneration, audits, internal controls, and shareholder rights.
Concerns such as pollution or waste material generated by a firm, as well as those related to climate change, are classified as “Environmental.”
ESG investing, or socially responsible investing, is also known as sustainable investing, impact investing, and mission-related investing. ESG investors are more activist than other types of investors, attending shareholder meetings and actively seeking to influence corporate policies and practices.
Each of the three components of ESG investing – environmental, social, and corporate governance – has a set of criteria that may be assessed by either socially conscious investors or corporations seeking to adopt a more ESG-friendly operational approach.
While many ESG criteria are subjective (such as “diversity” or “inclusion”), efforts are underway on various fronts to produce more objective, trustworthy ratings of a company’s success in terms of ESG policies and practises.
The ESG framework must take into account how ESG-friendly policies and practises are implemented.
How Does ESG Investing Work?
The ESG strategy means investing in firms that score highly on environmental and societal responsibility measures as evaluated by third-party, independent organisations and research bodies.
“At its foundation, ESG investing is about influencing good social change by becoming a better investor.” By addressing ESG criteria, investors have a more holistic perspective of the firms they support, which may help limit risk and uncover opportunities.
Here are the three criteria used to evaluate firms for ESG investing:
- Environmental Impact- How does a firm affect the environment? This might include a company’s usage of renewable energy sources, waste management programme, carbon footprint, harmful chemicals used in manufacturing processes, and supply chain sustainability activities.
- Social- How does the organisation increase its social effect, both within and externally? Social determinants include LGBTQ+ equality, ethnic diversity in the executive suite and total employees, and inclusion initiatives and recruiting processes. It even considers how a corporation promotes for social good outside of its immediate commercial context.
- Governance- How does the company’s board of directors and management influence beneficial change? Governance concerns everything from CEO compensation to leadership diversity, as well as how well that leadership reacts to and interacts with shareholders.
Why focus on Sustainability?
Climate action and sustainability reporting have been shown to have positive effects on businesses. Future-proofing your company’s performance requires active disclosure and discussion of its environmental, social, and governmental (ESG) consequences.