If you’re newly interested in sustainability, it’s hard to know where to start. Rather you’re looking to vet the companies you support, offset your carbon footprint, or simply educate yourself, ESG practices are vital to understand how investors and firms measure their performance.
What is ESG?
ESG (or Environmental, Social, and Governance) is a set of criteria that investors use to evaluate companies' performance and sustainability. This approach considers the company's environmental impact, social responsibility, and governance practices, which can have an impact on its long-term financial performance.
ESG investing has gained significant traction in recent years as investors increasingly prioritize sustainable investing. According to the Global Sustainable Investment Alliance, the global sustainable investment market has grown by 68% since 2014 and reached $35.3 trillion in assets under management in 2020.
Let's take a closer look at each of the ESG criteria:
The environmental aspect of ESG refers to a company's impact on the environment. It includes factors such as greenhouse gas emissions, resource usage, waste management, and environmental risks. Companies that prioritize reducing their carbon footprint, conserving natural resources, and reducing waste are generally considered to be environmentally responsible.
The social aspect of ESG refers to how a company manages its relationships with employees, customers, suppliers, and communities. It includes factors such as labor practices, human rights, diversity and inclusion, customer satisfaction, and community relations. Companies that prioritize fair labor practices, support human rights, and demonstrate a commitment to diversity and inclusion are generally considered to be socially responsible.
The governance aspect of ESG refers to a company's management and oversight practices. It includes factors such as board diversity, executive compensation, shareholder rights, and transparency. Companies with strong governance practices are typically well-managed, transparent, and accountable to their shareholders.
Investors who incorporate ESG criteria into their investment decisions may use a variety of approaches. Some investors may exclude companies that do not meet their ESG standards, while others may prioritize investing in companies that score high on ESG metrics. Some investors may also engage with companies to encourage them to improve their ESG performance.
In addition to the potential social and environmental benefits of ESG investing, there may also be financial benefits. Companies that prioritize sustainability and responsible governance may be better positioned to manage risks and capitalize on opportunities, which can lead to long-term financial performance.
In conclusion, ESG is an approach to investing that considers a company's environmental, social, and governance practices. Investors who incorporate ESG criteria into their investment decisions may be able to achieve both financial and social or environmental goals. As sustainable investing continues to grow, ESG criteria are likely to become increasingly important in evaluating companies' performance and sustainability.