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What is ESG?

What is ESG?

December 19, 2018

When it comes to finance, there is a lot of jargon that gets thrown around. Just when you think you’re starting to understand what’s being discussed, a new term hits the scene and the confusion starts all over again. When it comes to your own money and your investments, however, you definitely have a right to know exactly what’s going on.

A term that’s getting a lot of use right now is ESG. If you’re not familiar yet, don’t worry, we’ve got you. The E stands for Environmental, the S stands for Social, and the G stands for Governance. ESG factors are usually used in sustainable, responsible and impact investing and socially responsible investing (SRI). ESG criteria 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. Examples of ESG factors that may be analyzed when deciding where you should “responsibly” invest include a company's impact on climate change or carbon emissions, water use or conservation efforts, anti-corruption policies, health and safety policies, management of the supply chain, board diversity, human rights efforts, and involvement in community development.

Of course, part of investing is doing thorough research on a company’s profits, and often even their management team, before making any decisions. When, however, did it become common to look even further into a company’s inner workings before investing in them? Here’s a little history to clear up the backstory for you:

  • In 2004, former UN Secretary General Kofi Annan wrote to over 50 CEOs of major financial institutions asking them to find ways to integrate “ESG” into capital markets.
  • In 2005, the joint initiative that Annan started produced a report entitled “Who Cares Wins,” with Ivo Knoepfel as the author. The study backed up the concept that integrating environmental, social and governance factors in capital markets leads not only to better outcomes for societies but also strengthens the markets themselves by making them more sustainable. Thus, the term ESG was officially coined.
  • In 2006, the Principles for Responsible Investment (PRI) was launched at the New York Stock Exchange thanks to statistics released in “Who Cares Wins,” and other reports like it. PRI’s role is to advance the integration of ESG through thought leadership and the creation of tools, guidance, and engagement.
  • In 2007, the Sustainable Stock Exchange Initiative (SSEI) was also launched at the New York Stock Exchange.
  • In 2018, many a news articles discuss ESG, thousands of people hold the job title “ESG Analyst,” and around a quarter of all professionally managed assets around the world are estimated to be ESG investments.

The rapid growth of ESG investing probably has something to do with the fact that it is built on other sound investment movements that came before it, such as SRI. SRI, however, is first and foremost based on ethical and moral criteria. It’s true that this is a part of ESG investing as well, but the standards are also set to help investors avoid firms at risk of suffering tangible losses (think BP's oil spill or Volkswagen's emissions scandal). Even people who aren’t particularly concerned with the environment can’t deny that these events rocked the firms' stock prices and resulted in billions of dollars in associated losses. 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.

Many people interested in SRI won’t invest in alcohol, tobacco, firearms and/or anything else they personally object to. While it’s great to be able to know what investments you’d like to say no to, ESG criteria can also help you find financial opportunities that you can confidently say yes to! After all, it is much more productive to promote what you love than it is to disparage what you hate. ESG standards are subjective, and therefore, a great way to match your investments to your values. It is possible, and advisable, to profit without compromising your beliefs. It just takes some thought and research. If you need help getting started with this, feel free to contact us here at InTrack Investment Management. We love to talk ESG!