What is ESG Investing?
ESG stands for environmental, social, and governance. ESG investing focuses on how companies measure up against these three key criteria. Environmental assesses how a company protects the environment, social looks at relationships with employees, customers, and the community, while governance examines leadership, executive pay, audits, internal controls, and shareholder rights.
Key Takeaways
- Environmental, Social, and Governance (ESG) investing helps screen investments based on corporate responsibility metrics, favoring companies that act ethically.
- Many brokerage firms offer ESG-centric investment products.
- ESG investing can prevent portfolios from holding companies linked to risky or unethical practices.
How ESG Investing Works
ESG investing is often synonymous with terms like sustainable investing, responsible investing, impact investing, or socially responsible investing (SRI). Investors use ESG criteria to ensure they are backing companies that are good environmental stewards, uphold high social standards, and demonstrate accountable governance.
Let’s break down the components:
- Environmental Criteria: Investors evaluate climate policies, energy use, waste management, pollution controls, conservation of natural resources, and animal treatment. This includes examining greenhouse gas emissions and compliance with regulations.
- Social Criteria: Assesses relationships with stakeholders, ethical labor practices, workplace safety, community engagement, and employee relations.
- Governance Criteria: Covers corporate transparency, ethical accounting practices, leadership diversity, board accountability, and avoidance of conflicts of interest.
ESG Metrics
Leading investment firms, such as Trillium Asset Management, use precise ESG metrics to identify companies poised for strong, sustainable performance. These metrics exclude businesses in high-risk sectors like coal, hard rock mining, tobacco, and weaponry, and favor those with positive environmental impacts, ethical supply chains, and transparent governance practices.
Investors and ESG
As ESG practices become mainstream, firms like JPMorgan Chase, Wells Fargo, and Goldman Sachs publish elaborate annual ESG performance reports. Real change driven by ESG depends on stringent, actionable, and measurable criteria. Despite some industries offering strong returns but not meeting ESG standards, many investors willingly prioritize values over profits.
How is ESG Investing Different from Sustainable Investing?
Sustainable investing refers how the company’s decisions affect the world, while ESG investing focuses on the company’s environmental, social, and governance practices. Together, they ensure socially responsible and sustainable growth.
What Does ESG Mean for a Business?
Adopting ESG principles entails firms lowering their environmental footprint and fostering a diverse, inclusive workforce at all hierarchical levels.
How Do I Know Which Investments are ESG?
Financial firms like MSCI and Morningstar rate companies on ESG compliance. These ratings ensure investors can identify and choose businesses that meet high ESG standards.
The Bottom Line
ESG investing empowers you to support companies championing responsible practices. Align your portfolio with ESG-centric investments to contribute to societal and environmental betterment, while securing financial growth.
Related Terms: Sustainable Investing, Impact Investing, Socially Responsible Investing (SRI), Ethical Investing.
References
- S&P Global. “Understanding the ‘E’ in ESG”.
- Harvard Law School Forum on Corporate Governance. “Time to Rethink the S in ESG”.
- S&P Global. “What is the ‘G’ in ESG?”
- Statista. “ESG ETF Assets 2023”.
- Trillium Asset Management. “ESG Criteria”.
- Goldman Sachs. “Sustainability Reporting”.
- Wells Fargo. “Goals and Reporting”.
- JP Morgan Chase. “Environmental, Social and Governance”.
- ESG Analytics. “Green, Blue, Pink and Social Corporate Washing”.
