What is ESG investing?

ESG stands for Environmental, Social and Governance. ESG investing is the practice of taking these factors into consideration when making investment decisions. There is a very wide range of ESG-related strategies, from risk avoidance to positive-alpha seeking impact investing. ESG-conscious investors may either seek to avoid supporting companies with poor sustainability records, or may proactively invest in companies that benefit from long-term sustainability trends.

Investors looking to assess a company’s ESG risk would typically examine the company’s performance, plans, commitments and progress in numerous categories, and compare to other companies in the industry, as well as comparing industries and sectors. Investors will often look both at risks in a company’s own operations, as well as in the supply chain utilized by the company. Areas of interest often include the following

Environmental

The impact that a company has on the natural environment, either through its operations, supply chain or products. Environmental factors may include:

  • Greenhouse gas (GHG) emissions (e.g., carbon, methane) of operations
  • GHG emissions of supply chain
  • Resource use (e.g., energy, water)
  • Waste production (plastic, other non-recyclables sent to landfill, toxic waste production and disposal)
  • Energy sources (coal, fossil fuels, renewables, etc.)
  • Land use
  • Other high-profile risks (oil spills, mine reclamation, deforestation, water pollution)

Social

The impact that a company has on stakeholders, both internal (e.g. employees) and external (e.g. customers). Social factors may include:

  • Human rights issues
  • Modern slavery
  • Child labor
  • Working conditions
  • Employee relations
  • Diversity – gender, racial, etc.
  • Discrimination policies
  • Product quality and safety
  • Workplace safety
  • Responsible marketing
  • Human rights in the supply chain
  • Board diversity

Governance

The systems governing the implementation, monitoring and reporting of rules and practices put in place by a company. Governance factors may include:

  • Bribery and corruption policies and practices
  • Board structure
  • Board quality and experience
  • Board size
  • Board independence (insiders vs independent directors)
  • Executive and director pay
  • Say on pay
  • Whistleblower policy
  • ESG disclosure policies
  • Shareholder rights
  • Balancing of stakeholder interests
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