What is ESG and why is it important? The E in ESG stands for environment, the S for social, and the G for governance. ESG investing is a valuable way to screen investment opportunities and create an action plan that aligns business objectives with important sustainable practices. The first step is to understand the environmental criteria of a strong sustainability plan.
Understanding the E in ESG: What Does It Mean for Your Investment?
The environmental factor refers to the preservation of the natural world. Issues that fit into this category include water and air pollution, climate change, water scarcity, deforestation, carbon emission reduction, and greenhouse gas emissions. Businesses can look at this through the lens of investment opportunities, and investors can better understand a business’s value by checking its ESG rating.
What Is an ESG Rating?
ESG scores provide an objective way to measure how a company, security, or fund performs with respect to environmental preservation, human interdependencies, and the processes and logistics used to run an organization. The rating system can be industry-specific, meaning it considers ESG factors that directly affect the industry, or it can be industry-agnostic and include factors that affect all businesses across a broad spectrum of industries. A broader evaluation would include elements such as climate change, human rights, and diversity.
Professionals create ratings based on several platforms used to analyze how a business conducts itself. For example, they can evaluate public information about the company and corporate disclosures. A rating agency can produce ESG scores by taking the information gathered during analytics and comparing the results to other companies in the same industry.
What Is the Relationship Between ESG and Sustainability?
With the increasing awareness surrounding global warming and environmental protection, the E in ESG has become a highly relevant topic for large companies capable of creating a substantial carbon footprint. Investors look for buzzwords around sustainability and ESG and commonly use them synonymously. However, there is a more nuanced approach to both.
In the simplest terms, ESG defines specific criteria to approach business sustainability. A sustainable business uses only what it needs to operate effectively. Over time, though, businesses and industries diluted the term, creating policies that take away from the original concept. ESG sustainability shifts the focus directly to social standards reflecting high morals and an understanding of the environment’s vulnerability.
Using ESG ratings, companies have more than just a moral obligation to create specific environmental policies. Investors can hold them accountable by using the score to weigh risks. ESG scores shed light on social, political, technological, economic, and environmental components of operations, creating a clear picture for investors. Additionally, these measurements help businesses mitigate risks and develop action plans they implement to assist future sustainability practices and promote growth.
What Are Common Criteria for ESG Investing?
A more thorough understanding of ESG and sustainability is crucial to scoring well for investors. While analysts can create criteria specific to a company’s industry and sectors, common questions around environmental criteria include:
- What are the company’s best practices for waste reduction?
- Does the company produce reports with data on carbon?
- Does the company provide a sustainability report with accurate data showing specific practices employed to protect the environment?
- How has the company adjusted energy usage to incorporate renewable sources?
- What does the company do to limit the release and usage of harmful chemicals and pollutants and lower greenhouse gas emissions?
Social criteria generally include ethical chains of supply, living wages for employees, policies to protect employees from sexual misconduct, no signs of safety issues in the workplace or employing children, and a show of support for minority rights. For the G in ESG, companies may evaluate board elections and look for diversity among board members. Does the company embrace transparency and have someone other than the CEO as the board’s chair?
Benefits of ESG Investing
Companies operating with ESG ratings in mind are more likely to gain traction and the attention of investors. Investment firms track these companies and recognize the genuine momentum to create real change.
How To Apply the E in ESG to Your Investment Policy
What is ESG and why is it important? Reducing the carbon footprint is the overall goal, and measuring efforts to reach that end is the purpose of the E in ESG. How a company performs when judged on the environmental, social, and governance criteria established to more accurately measure sustainability can drastically affect its bottom line. This same practice provides investors with a strong risk assessment. To form your ESG action plan, contact ESG Property Consultants.