Breaking Down ESG

| January 17, 2019
Share |

ESG refers to the factors used to measure the sustainability and ethical impact of an investment in a company. These criteria are usually used in sustainable, responsible and impact investing and socially responsible investing (SRI). ESG factors set a standard for company operations. If you are trying to be socially conscious with your money, then you should probably not invest in a company if it does not meet these standards. ESG criteria aren’t solely about deciding what individuals deem to be right and wrong; the factors are also based on actual financial performance and relevance.

What does the “E” stand for?

The “E” represents the environmental criteria analyzed when participating in ESG investing. People who are interested in this kind of investing care about how a company performs as a steward of the natural world. These investors will examine a company’s energy use, waste, pollution, natural resource conservation, and animal treatment.

When it comes to ESG investing, we must also consider how a company’s environmental exposure affects future profitability. For example, is the company associated with any contaminated land? How do they dispose of any hazardous waste and/or manage toxic emissions? Are they compliant with the government’s environmental regulations? Are they big polluters who could be vulnerable to potential future climate rules? Do they try to use renewable resources and alternative energy whenever possible?

These are things that many people in today’s society care about. Therefore, it makes sense that it’s swaying investment trends as well. If the environment is something you fight to protect and you want to know how to make a positive impact with your investments, try seeking out the help of a financial advisor. They can make some suggestions about investments that align with your personal values that are also not too risky to invest in.

What does the “S” stand for?

The “S” represents the social criteria analyzed when participating in this ESG investing. People who are interested in this type of investing care about a company’s business relationships. These investors will examine how a company manages relationships with its employees, suppliers, customers and the communities where it operates.

How companies treat individuals is important to a lot of people. It is also true that happy, well-paid employees are more productive and loyal. In order to invest in a good company that hires talented people, we must consider a variety of things. Does the company put their money where their mouth is? Do their actions match their proclaimed values? How are they involved with the surrounding communities? Do they participate in any volunteer work? Do the working conditions show concern for the employee's health and safety? Are stakeholders’ interests taken into consideration?

You are allowed to ask, does this company contribute to or detract from society, before making an investment. There are ways to profit that align with your morals. In fact, markets regularly punish detractors. Companies with high turnover among employees or frequently occurring strikes, for example, are not stable and therefore do not always perform well in the stock market. On the other hand, companies that have a good reputation in their community, and hopefully beyond, are often less vulnerable to things like new local taxes, regulations, and lawsuits, and have an easier time getting things like governmental permits. Really, companies that help society usually, in turn, help themselves.

What does the “G” stand for?

The “G” represents the corporate governance criteria analyzed when participating in ESG investing. People who are interested in this kind of investing care about the systems, structures, and policies governing a corporation. These investors will examine a company’s leadership, executive pay, audits, internal controls, shareholder rights, and so on.

It is important to look into the core business functioning of a company before investing because this can affect their profitability and stock market valuations. Many people consider this to be logical and fair, as they wouldn’t expect or even want an unorganized and/or unethical company to be performing well. So, when it comes to ESG investing, we must ask questions like does the company use accurate and transparent accounting methods? Is their board good at protecting and enhancing shareholder value? Are common stockholders allowed to vote on important issues? Does the company avoid conflicts of interest in their choice of board members? Do they make sure to not use any political contributions to obtain favorable treatment? Is the company good at managing reputational risk?

Believe it or not, it is even important to double check that companies are not engaging in any illegal behavior. Of course, when it comes to staying true to your values when investing, aspects of corporate governance will probably matter to you quite a bit. Besides, these criteria should be analyzed anyway to avoid taking too great of a risk.

ESG factors can also help you find investment opportunities that you can confidently say "yes" to. Again, we recommend seeking out a financial advisor if you’re new to this kind of investing or want to know more than what we’ve said here. There’s plenty of information out there on how you can still see financial return while staying true to your core values.

Share |