What Are Environmental, Social and Governance (ESG) Criteria?
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. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
The Evolution of ESG Investing
ESG is growing in significance amongst both institutional and retail investors. The practice of ESG investing began in the 1960s as socially responsible investing, with investors excluding stocks or entire industries from their portfolios based on business activities such as tobacco production or involvement in the South African apartheid regime.
Today, ethical considerations and alignment with values remain common motivations of many ESG investors but the field is rapidly growing and evolving, as many investors look to incorporate ESG factors into the investment process alongside traditional financial analysis.
How Environmental, Social and Governance (ESG) Criteria Work
To assess a company based on environmental, social, and governance (ESG) criteria, investors look at a broad range of behaviors.
Environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks. For example, are there issues related to its ownership of contaminated land, its disposal of hazardous waste, its management of toxic emissions, or its compliance with government environmental regulations?
Social criteria look at the company’s business relationships. Does it work with suppliers that hold the same values as it claims to hold? Does the company donate a percentage of its profits to the local community or encourage employees to perform volunteer work there? Do the company’s working conditions show high regard for its employees’ health and safety? Are other stakeholders’ interests taken into account?
With regard to governance, investors may want to know that a company uses accurate and transparent accounting methods and that stockholders are given an opportunity to vote on important issues. They may also want assurances that companies avoid conflicts of interest in their choice of board members, don’t use political contributions to obtain unduly favorable treatment and, of course, don’t engage in illegal practices.
4 Benefits of ESG
ESG training helps create good corporate citizens. Here are some reasons why CSR and ESG positively elevate businesses.
1. Positive Brand Identity
When business owners and employees are known for being good corporate citizens, it helps your company develop a positive brand identity. People will tend to think more highly of your business, creating a sense of trust, and more easily get behind your mission.
2. Attract New Clients and Investors
A positive brand identity attached to your business is attractive to new clients and consumers. A business with vetted and recognized social and environmental standards is also appealing to new investors. Fiscally responsible ESG investors will be more open to supporting a company that is interested in the greater good, not just profit.
3. Attract Better Employees
In addition to attracting more investors and clients, upholding strong ESG principles can also draw in high-quality employees. Being an ethical corporate citizen pays off. Company’s that uphold CSR attract more loyal, qualified employees and see boosts in financial performance.
4. Reduce Risk
Less risk is associated with running a business when you make CSR and ESG principles top priorities. Firms that are motivated to “go green” tend to see lower risk, which is a huge factor that investors take into account. Be dedicated to running an ethical, environmentally aware company. As a result, you are likely to see long-term growth, especially as the focus on ESG continues to grow.