January 11, 2023
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ESG stands for Environmental, Social and Governance. It is a set of criteria used to assess the sustainability and ethical impact of investments. ESG has become increasingly important in recent years as investors have become more mindful of the environmental, social and governance issues associated with their investments. ESG criteria can help investors identify companies that are making positive contributions to society, while avoiding those that may be contributing to negative environmental or social outcomes. By investing in companies with strong ESG ratings, investors are able to ensure that their money is being used to support sustainable businesses while also helping to protect the environment and promote positive social change.

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ESG stands for Environmental, Social and Governance. It is a set of principles and criteria that organizations use to assess their performance and evaluate their impact on society. ESG is becoming increasingly important as businesses strive to become more responsible and sustainable. Companies are now focusing on how they can reduce their environmental footprint, improve social conditions in the communities they operate in, and ensure good governance practices. This has made ESG an essential part of corporate strategy for many companies.

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ESG stands for Environmental, Social and Governance. It is a set of criteria used to measure the sustainability and ethical impact of an investment in a company or organization. ESG criteria are becoming increasingly important in the investment world as investors look to make more responsible investments. As such, ESG has become an important topic for financial professionals, who need to understand how it works and how it affects their investments. This article will discuss the basics of ESG, its importance, and how investors can use it to make more informed decisions.

“What Is Environmental, Social, and Governance (ESG) Investing?” Sharing apart of this article

Environmental, Social, and Governance (ESG) Criteria — Investopedia / Julie Bang

What Is Environmental, Social, and Governance (ESG) Investing?

Environmental, social, and governance (ESG) investing refers to a set of standards for a company’s behavior used by socially conscious investors to screen potential investments.

Environmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change, for example. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

KEY TAKEAWAYS

Environmental, social, and governance (ESG) investing is used to screen investments based on corporate policies and to encourage companies to act responsibly.
Many mutual funds, brokerage firms, and roboadvisors now offer investment products that employ ESG principles.
ESG investing can also help portfolios avoid holding companies engaged in risky or unethical practices are held accountable.
The rapid growth of ESG investment funds in recent years has led to claims that companies have been insincere or misleading in touting their ESG accomplishments.

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How Environmental, Social, and Governance (ESG) Investing Works

Investors have, in recent years, shown interest in putting their money where their values are.

As a result, brokerage firms and mutual fund companies have started offering exchange-traded funds (ETFs) and other financial products that follow ESG investing strategies. Roboadvisors including Betterment and Wealthfront have promoted these ESG-themed offerings to younger investors.

ESG investors are also increasingly informing the investment choices of large institutional investors such as public pension funds. According to an industry report from US SIF Foundation, investors held $17.1 trillion in assets chosen according to ESG principles in 2020, up from $12 trillion just two years earlier.1 ESG-specific mutual funds and ETFs also reached a record $400 billion in AUM in 2021, up 33% from the year before – and are expected to continue to grow rapidly in the coming years.2

ESG investing is sometimes referred to as sustainable investing, responsible investing, impact investing, or socially responsible investing (SRI). To assess a company based on ESG criteria, investors look at a broad range of behaviors and policies.

58%

The share of respondents to a survey by Investopedia and Treehugger who indicated increased interest in ESG investments in 2020. 19% reported using ESG considerations in selecting investments.

Environmental, Social, and Governance

ESG investors seek to ensure the companies they fund are responsible stewards of the environment, good corporate citizens, and are led by accountable managers.

Environmental

Environmental issues may include corporate climate policies, energy use, waste, pollution, natural resource conservation, and treatment of animals. ESG considerations can also help evaluate any environmental risks a company might face and how the company is managing those risks.

Considerations may include direct and indirect greenhouse gas emissions, management of toxic waste, and compliance with environmental regulations.3

Human influence is unequivocally to blame for the warming of the planet and some forms of climate disruption are now locked in for centuries, according to a report from the U.N. Intergovernmental Panel on Climate Change.4 “This report must sound a death knell for coal and fossil fuels before they destroy our planet,” said United Nations Secretary-General António Guterres.

Social

Social aspects look at the company’s relationships with internal and external stakeholders.5

Does it hold suppliers to its own ESG standards? Does the company donate a percentage of its profits to the local community or encourage employees to perform volunteer work there? Do workplace conditions reflect a high regard for employees’ health and safety? Or does the company take unethical advantage of its customers?

Socially responsible investing (SRI) is an investment strategy that highlights this one facet of ESG. SRI investors seek companies that promote ethical and socially conscious themes including diversity, inclusion, community-focus, social justice, and corporate ethics, in addition to fighting against racial, gender, and sexual discrimination.

Governance

ESG governance standards ensure a company uses accurate and transparent accounting methods, pursues integrity and diversity in selecting its leadership, and is accountable to shareholders.6

ESG investors may require assurances that companies avoid conflicts of interest in their choice of board members and senior executives, don’t use political contributions to obtain preferential treatment, or engage in illegal conduct.

ESG Criteria

Investment firms following ESG investing often set their own priorities. For example, Boston-based Trillium Asset Management, with $5.6 billion under management as of December 2021, uses a variety of ESG factors to help identify companies positioned for strong long-term performance.7

The criteria are set by analysts who identify the relevant issues facing specific sectors, industries, and companies. Trillium’s ESG criteria preclude investments in the following:

Companies that operate in higher-risk areas or have exposure to coal or hard rock mining, nuclear or coal power, private prisons, agricultural biotechnology, tobacco, tar sands, or weapons and firearms.
Companies involved in major or recent controversies over human rights, animal welfare, environmental concerns, governance issues, or product safety.

In contrast, Trillium looks for investments meeting the following ESG criteria:

Environment

Publishes a carbon or sustainability report
Limits harmful pollutants and chemicals
Seeks to lower greenhouse gas emissions and CO₂ footprint
Uses renewable energy sources
Reduces waste

Social

Operates an ethical supply chains
Avoids overseas labor that may have questionable workplace safety or employ child labor
Supports LGBTQ+ rights and encourages all forms of diversity
Has policies to protect against sexual misconduct
Pays fair (living) wages