ESG stands for Environment, Social and Government. It is a set of standardized criteria for a company’s operations for social and environmental consciousness for potential investments. Each sector in ESG, environment for example, mainly performs as a nature guardian. Social in this case examines relationship management within employees, suppliers, customers and the communities. Governance would be about company’s leadership, executive pay, audits, internal controls, as well as shareholder rights, described Investopedia.
ESG investing has many terms.
It includes sustainable investing, responsible investing, impact investing and SRI (socially responsible investing). ESG has metrics that are sometimes not mandatory for financial reporting. But some institutions are using the metrics to define their investment process. Some of them are SASB (Sustainability Accounting Standards Board), GRI (Global Reporting Initiative), and TCFD (Task Force on Climate-related Financial Disclosures).
ESG is basically very popular for investors if they want to evaluate companies they want to invest in. Generally, they would discern about the company’s ESG criteria. Today a lot of sectors such as mutual funds, brokerage firms, robo-advisors offer products that have ESG criteria. In the same analysis, ESG actually can help investors avoid companies with risk due to the environment and other practices.
Key Aspects of ESG Criteria!
There are three central criterias in ESG; Environment, Social and Government. In the environment criteria, the company is assessed through energy use, waste, pollution, natural resource conservation, and treatment of animals. These kinds of criterias would help investors assess the company’s environmental risk, especially about how the company manages to tackle those risks.
The epitome would be, investors could evaluate the company from ownership issues regarding contaminated land, the disposal of hazardous waste, toxic emissions management, and even its responsibility to fulfill government environmental regulations.
In the social aspect, the investors could see the company’s business relationship.
Especially in the part that suppliers have the same ESG vision and mission. Sometimes, it is not only about social responsibility to the environment but also technical positivity such as employees health and safety. It could also be in the form of taking social responsibilities to encourage communities and employees for doing volunteerism etc.
In the government aspect, investors would look at how the overall leadership is going on as well as accounting methods transparency. It includes whether or not stakeholders can vote on the significant issues. Investors might want to assure whether or not the company has conflicts of interest within the broad members. Conflicts of interest majorly occur when an entity or individual becomes unreliable due to clash between self interest. For instance they have a conflict about money, status, knowledge, relationship, as well as reputation. In this case, investors would likely choose a company that does not use political contribution to treat the risks, and does not engage in illegal practices.
To sum up, investors might expect a company to pass every category, But no company is perfect. Sometimes, there are one or two categories that are not fulfilled well. On this occasion, investors could re-evaluate by deciding what is important for them.
