ESG is the abbreviated version of ‘Environmental, Social, and Governance’, criteria that many investors use alongside financial factors in their investment decisions.
Broadly speaking, environmental criteria look at a company’s environmental stewardship, including energy use, pollution, waste management, animal welfare, climate change and conservation. When we talk about social criteria, we mean the manner in which a company conducts its internal and external relationships. What type of employee relations does it have? Does it favour diversity? What is its record on health and safety? How does it interact with and support its local community? Governance, as you would expect, is about how the business is governed. This area covers such things as transparent and robust accounting and reporting methods, board structure, executive remuneration, and whether they engage in corruption and bribery.
ESG criteria at a glance:
Energy use, waste and pollution, animal welfare, climate change, conservation
Working conditions, Employee relations, Diversity, Health and safety, Community engagement
Accounting and reporting methods, Board structure, Executive remuneration, Corruption and bribery
ESG is gaining momentum and becoming more important to companies and investors alike. Alongside financial metrics, ESG criteria are assuming an increasingly important role in investment decisions. They are an important indicator of potential risks within a company, risks that could negatively impact share and bond prices. For example, a company with a dubious environmental or health and safety record would not only face reputational damage but might also be subject to significant financial penalties and/or other sanctions – all of which could have a considerable impact on the company’s business and profitability. This in turn, could have repercussions for an investor’s investment.
ESG factors can also offer opportunities to drive positive change. For example, it can encourage companies to pay more attention to sustainability and environmental protection in their business activities. This is in part because investors are increasingly favouring environmentally friendly companies that implement sustainable programmes or solutions.