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What is ESG, and why should we care?

Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. ESG criteria consider the three central factors in measuring the sustainability and societal impact of an organization or company. Put simply, ESG investing is investing with consideration for these three pillars. This type of sustainable investing has gained significant traction in recent years as more investors look to support companies that reflect their personal values. Let’s take a closer look at each pillar of environmental, social, and governance standards

Environmental Criteria: How is the company polluting? How well is it managing its carbon footprint and energy usage? What is its waste management strategy? Are its products environmentally friendly or harmful? Is the company engaged in environmentally friendly practices such as renewable energy? Does it have a good record on environmental compliance? Screening for environmental factors is important for individuals concerned about climate change and interested in supporting companies that operate sustainably.

However, some companies may not have strong marks in all environmental categories but could excel in others. It is important to consider a company’s overall strategy and improvement trajectory when determining whether it meets your ESG criteria. For example, a coal company might have high emissions but could be working towards reducing them by investing in renewable energy. In this case, you would want to consider whether the company’s emissions reduction goals are achievable and its plans for getting there are realistic before making an investment decision. Generally speaking, companies that are proactively trying to reduce their environmental impact are considered better long-term bets than those that are not taking any actions at all.

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Social Criteria: Does the company discriminate based on factors like race, gender, religion, or sexual orientation? How does it treat its employees relative to industry norms – do they have good working conditions, benefit packages, job security? What is the company’s attitude towards human rights? Does it avoid doing business with countries that violate human rights laws? Does it employ child labor or engage in other unethical practices?

Weighing social factors is important for individuals who want to invest in companies that promote social responsibility and equality. Like environmental concerns, some companies might lag behind their peers in some social categories but excel in others. It is crucial to review a company’s policies and actual behaviors before making an investment decision. For example, a clothing company might have a “no sweatshops” policy but outsource its manufacturing to countries with poor records on human rights. In this case, you would want to research the conditions of the factories where the company’s products are made before deciding whether or not to invest. Generally speaking, companies that have strong policies against discrimination and that respect human rights are considered better long-term bets than those that do not.

Governance Criteria: Is the company transparent about its business dealings and finances? Are its executives compensated fairly relative to industry norms? Do insiders own a significant portion of shares outstanding? Is there evidence of bribery or corruption within the organization?

Analyses of governance structures are important for individuals who want to invest in companies that are well-managed and operated ethically. Good corporate governance reduces risk by ensuring that a company is run responsibly and transparently. As with environmental and social factors, some companies might score poorly in certain governance categories but excel in others. For example, a mining company might be very transparent about its business dealings but have insiders owning a large portion of shares outstanding. In this case, you would want to review the ownership structure of the company before making an investment decision. Generally speaking, companies with strong corporate governance practices are considered better long-term bets than those that do not have such practices in place.

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ESG investing has gained significant traction in recent years as more investors look to support companies whose operations reflect their personal values around environmentalism, social responsibility, and ethical business practices (governance). While all three pillars – environmentalism (E), social responsibility (S), and governance (G) – are important considerations when determining which companies to invest in from an ESG perspective, it is also important to remember that no company will be perfect across all three dimensions.

Are you looking at companies that don’t have clear ESG compliance reporting practices? Organizations that use EmpoweredESG have access to ISSB frameworks and EU taxonomy alignment as well as alignment to the 17 Sustainable Development Goals from the United Nations. Check out EmpoweredESG today.

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