What is ESG Investing?

ESG stands for Environmental, Social, and Governance, a framework used to evaluate the sustainability and ethical impact of an investment in a business or company. ESG criteria are increasingly becoming crucial for investors who wish to ensure their investments align with their values and contribute positively to society. However, a definitive list of environmental, social and governance (ESG) issues does not exist. It would not be possible or desirable to produce a list, or a set of definitions, that claimed to be exhaustive or definitive. Any such list would inevitably be incomplete and would soon be out of date (PRI).

Environmental Criteria

The environmental aspect of ESG focuses on how a company performs as a steward of the natural environment. This may include considerations such as:

• Climate Change Mitigation: Companies may reduce their carbon footprint through renewable energy initiatives and efficient resource use.
• Waste Management: Effective strategies to minimise waste production and promote recycling.
• Sustainability: Adoption of sustainable practices in sourcing materials and production processes.

Example: A company investing in renewable energy sources such as solar or wind power to reduce its greenhouse gas emissions.

Social Criteria

Social criteria examine how a company manages relationships with employees, suppliers, customers, and the communities where it operates. Key factors may include:

• Labour Practices: Ensuring fair wages, safe working conditions, and non-discriminatory policies.
• Community Engagement: Investing in local communities and maintaining good relationships with them.
• Customer Satisfaction: Providing high-quality products and services that meet or exceed customer expectations.

Example: A corporation implementing robust health and safety protocols to protect its workforce and engaging in fair trade practices.

Governance Criteria

Governance pertains to a company's leadership, executive pay, audits, internal controls, and shareholder rights. Important governance factors may include:

• Board Diversity and Structure: Ensuring a diverse and independent board of directors.
• Ethical Business Practices: Adhering to anti-corruption policies and transparency in financial reporting.
• Shareholder Rights: Protecting the rights and interests of shareholders, including transparent communication and fair voting procedures.

Example: A company that implements a clear code of ethics and has a diverse board that oversees decision-making processes.

Purpose of ESG

The primary purpose of ESG is to provide a comprehensive framework for investors to assess the long-term sustainability and ethical impact of their investments. By integrating ESG criteria into investment analysis, investors can:

• Identify Risks and Opportunities: ESG analysis can reveal risks and opportunities that traditional financial metrics might overlook, such as environmental regulations or social license to operate.
• Promote Sustainable Practices: Encourage companies to adopt more sustainable and ethical practices, contributing to long-term societal and environmental well-being.
• Enhance Financial Performance: Studies have shown that companies with strong ESG practices often perform better financially in the long term, as they are better managed and more resilient to various risks.

ESG criteria are essential tools for modern investors who seek to align their investments with their values while also aiming for sustainable financial returns. By understanding and incorporating ESG factors, investors can contribute to a more sustainable and ethical global economy.