Environmental, Social, and Governance
Overview
Environmental, Social, and Governance (ESG) refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business. These criteria help to better determine the future financial performance of companies (ROI). ESG was first used in 2005 in a study titled "Who Cares Wins". Today, it is used in diverse industries and sectors for a wide range of activities.
Environmental Criteria
The environmental criteria consider how a company performs as a steward of the natural environment. Environmental criteria may include waste and pollution, resource depletion, greenhouse gas emissions, deforestation, and climate change. Companies are encouraged to have a smaller environmental footprint and to minimize their environmental impact.
Social Criteria
The social criteria examine how a company manages relationships with its employees, suppliers, customers, and the communities where it operates. Social criteria may include employee relations and diversity, working conditions, local communities, health and safety, and conflict. Companies are encouraged to foster a positive impact on the society in which they operate.
Governance Criteria
The governance criteria involve a company’s leadership, executive pay, audits and internal controls, and shareholder rights. Governance criteria may include board diversity and structure, executive compensation, bribery and corruption, and corporate structure. Companies are encouraged to have a transparent, ethical, and effective governance structure.
ESG Investing
ESG investing, also known as sustainable investing, is about investing in progress and recognizing that companies solving the world's biggest challenges may be best positioned to grow. It is about pioneering better ways of doing business and creating the momentum to encourage more people to opt in to the future we are working to create.
ESG Rating
An ESG rating is a measure of a company's performance in environmental, social, and governance matters. It is used by investors to assess a company's risk and performance in these areas. The rating is based on a range of indicators, such as carbon emissions, labor practices, and corporate governance.
ESG Reporting
ESG reporting is the disclosure of data about a company's environmental, social, and governance performance. It is used by investors, regulators, and other stakeholders to assess a company's impact on society and the environment, and its corporate governance practices.
Challenges in ESG
Despite the growing interest in ESG, there are several challenges that need to be addressed. These include the lack of standardization in ESG metrics, greenwashing, short-termism, and the need for more education and awareness about the importance of ESG.
Future of ESG
The future of ESG is likely to involve greater integration of ESG factors into investment decisions, more standardized and reliable ESG data, and increased regulatory oversight. As more investors recognize the importance of ESG, it is expected to become a more prominent part of the investment landscape.