ESG investing is currently estimated to have $20 trillion in assets under management. This represents almost one quarter of all professionally managed assets around the world, which begs the question: What is ESG Investing?
ESG stands for Environmental, Social and Governance. ESG investing grew out of Socially Responsible Investing (SRI). Instead of excluding companies based on moral judgements like SRI, ESG investing aims to use ESG factors to add insight beyond traditional analysis into the potential performance of companies. ESG investing criteria “is a set of standards for a company’s operations that socially conscious investors use to screen potential investments.” ESG investing has seen a tremendous rise as of late for many reasons. The world is changing, and global sustainability challenges are introducing new risk factors that investors have not seen before. Investors are changing and asking for more from their investments. Data and analytics are changing, providing investors with new insights into how ESG factors impact investment selection.
The environmental factors include climate change, natural resources, pollution & waste, animal treatment and environmental opportunities. The environmental factors focus on how companies perform as a steward of the natural environment. What environmental risks may affect the company’s profits? What are they doing to manage those risks? How are they dealing with climate change? How do they dispose of company waste?
The social factors include human capital, product liability, stakeholder opposition and social opportunities. The social factors examine how a company manages its relationships with employees, suppliers, customers and the communities it operates in. Does the company work with suppliers with the same or similar values? Does the company donate to their community or perform volunteer work? Do the working conditions show a high regard for employee health and safety?
The governance factors include corporate governance and corporate behavior. The governance factors take into consideration the company’s leadership, executive pay, internal controls and shareholder rights. Is the company using accurate and transparent accounting methods? Is the Board of Directors free of conflicts of interest? Does this company use political contributions to obtain favorable treatment? How diverse is the Board of Directors?
Investors will consider many of these ESG factors when looking to implement ESG investing. They believe that the integration of ESG criteria will lead to superior investment results. They believe their investments should reflect their values. They believe their investments should make a difference in the world. ESG criteria is subjective, therefore investors will need to do their own research and implement criteria that matches their values or work with their advisors. In addition, it is important to remember that different companies will face different ESG risks and opportunities. As a result, they need to be evaluated on a case by case basis based on their specific industry.
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