ESG stands for Social Environment and Governance and refers to the three most important factors in measuring the sustainability and ethical impact of investing in a company or business. Many socially responsible investors audit companies based on ESG Screening Standards.
It is a term commonly used in the financial markets and widely used by investors to analyze corporate behaviour and determine the future performance of companies.
Environmental, social and governance issues are some of the non-financial performance indicators that include ethical, sustainability and corporate governance issues, such as accounting for the corporate carbon footprint and ensuring environmental compliance.
Since the beginning of this decade, the number of mutual funds with ESG factors has grown significantly and is expected to continue to grow exponentially in the coming decade.
ESG three central factors are:
Environmental criteria, which examine how a business performs as a steward of our natural environment, focusing on:
- waste and pollution
- resource depletion
- greenhouse gas emission
- deforestation
- climate change
Social criteria, which look at how the company treats people and concentrates on:
- employee relations & Diversity
- working conditions, including child labour and slavery
- local communities; seeks explicitly to fund projects or institutions that will serve poor and underserved communities globally
- health and safety
- conflict
Governance criteria examine how a corporation polices itself – how the company is governed, and focus on:
- tax strategy
- Executive remuneration
- donations and political lobbying
- corruption and bribery
- board diversity and structure
Environmental Social and Governance are the three main factors that socially responsible investors measure when deciding whether to invest in a company. It is a generic term used in capital markets.
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 your priorities – so you will need to research if you want to seek out investments that precisely match your values.
The world of ESG and alternative investments
ESG principles are slowly becoming an important part of the investment world again. ESG issues are not only important for assessing the sustainability of non-financial investment impacts but can also affect long-term returns and the risk profile of an investment portfolio.
A recent study showed that investors who choose ESG investments receive “double benefits” in lower risk** and better returns.
** Rate of return is the ratio of return on investment to initial cost.
Companies that implement ESG principles have been found to be smarter, take less risk and, as a result, be more successful in achieving their long-term business goals.
Traditional investors are increasingly interested in ESG processes, and many are beginning to use risk assessment criteria when making investment decisions.
Based in TriLink Global LLC, a private equity firm specializing in developing and managing new infrastructure.
“ESG Standards Offer Another Level of Value for Shareholders. United Nations in 2006.”
“ESG eliminates unsustainable companies with a legacy and risky operations, reducing the risk of investing in companies with high performance.”
CSR-oriented investment is a good investment
The practice of considering environmental, social and governance issues when evaluating investment opportunities has evolved significantly since its inception.
Value and value investors use different strategies from an ESG perspective for each class.
SRI (Socially Responsible Investment) is a term for an investment strategy that considers the social impact of an investment. There are many approaches to SRI, the most important of which are an investment, environmental and social (ESG) investing, and equity investing.
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* The CFA Department published a report last year – Environmental, Social and Governance Issues in Investments: A Guide for Investment Professionals – Osman Hayat, CFA and Matt Orsag, CFA, CIPM.
“However, the body of evidence shows that there is a misconception that ESG has a negative impact on financial performance.”
The rationale behind discussing ESG issues with investment professionals is that looking at ESG issues will improve financial analysis and improve investment decisions. “
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* The CFA Institute in Charlottesville, Virginia begins offering the Certified Financial Analyst (CFA) designation.
In another article published by the CFA Institute – Incorporating ESG into a Fixed Income Portfolio – Christoph Klein, CFA, says that incorporating ESG criteria into a mutual fund analysis can reduce individual risk. And portfolio risk, improve efficiency, improve credit rates, credit spreads and price changes.
The Financial Times Dictionary talks about ESG.
“ESG (Environment, Social and Governance) is a general term that is used in the capital market and investors use to analyze the company’s behaviour and determine its future performance.”
“The ESG factor is part of a non-financial performance indicator that looks at the sustainability and management issues of values, such as ensuring that companies have measures to manage their carbon footprint.” to ensure accountability.
People’s attitudes are changing
Google and Impax surveyed over 300 investors with £500,000 ($700,000) or more of long-term savings and investments. The aim was to determine their attitudes to climate change following the COP21 Conference in Paris.
Below are some of the survey’s findings:
- 70% of respondents said they were concerned about climate change.
- 15.3% said they had taken steps of both investing in sustainable/clean energy stocks plus not investing in fossil fuels.
- 33.5% claimed to currently have investments that are focused on clean energy, energy efficiency or sustainability.
In the Financial Times, Nair quoted Hamish Chamberlain, director of SRI at Stuart Henderson Global Markets:
“Over the next few years, the global economy will transform into a low-growth economy, which will be one of the greatest investments of all time. This is our life.”
“Our global economy is about 80 trillion. In the next 10 to 20 years, it has enormous risks and opportunities.”