A new concept has been gaining popularity among investors in the past few years: ESG. ESG stands for “Environmental, Social, and Governance” and refers to a company’s operations that some investors use to screen potential investments.
Besides appealing to socially conscious investors, ESG criteria also signal operational efficiency. ESG has become so popular, in fact, that sustainable investing now accounts for one-third of total U.S. assets under management according to the US SIF Foundation.
“US SIF Foundation’s 2020 biennial ‘Report on US Sustainable and Impact Investing Trends,’ shows that sustainable investing assets now total $17.1 trillion, a 42% increase over 2018. Sustainable investing covers a wide swath of investing to consider both financial return and social and environmental good. It can cover anything from reducing harmful impacts on the environment, to fair labor practices to promoting independent corporate board governance.”
ESG investing now accounts for one-third of total U.S. assets under management – Source: MarketWatch
Environmental criteria may include a company’s policies regarding clean energy, carbon emissions, nature conservation, and animal treatment. The criteria may also be related to how the company manages environmental risk such as water contamination or disposal of hazardous waste, for instance.
Social criteria are related to how a company manages relationships with employees, suppliers, customers, and communities. Social responsibility, involvement with charities, employee benefits and working conditions are all included here.
Governance is about getting in front of violations before they occur, involving shareholders in executive decisions and ensuring transparency and dialogue with regulators. Governance deals with a company’s leadership, diversity, executive pay, compliance audits, accounting practices, and shareholder rights.
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