Embracing ESG in Investing

ESG criteria in investing refers to environmental, social, and governance of the company, and its policies.  It is not merely the domain of socially-conscious eco-warriors, but an investment strategy that mitigates risk.  In an era of climate change, where businesses have to adapt to the consequences of the lack of sustainable growth, it should be a standard for most businesses.  In an age of activist consumerism, this also has a direct effect on revenue through loss of market, or legal sanction.  ESG criteria is a great asset in helping investors avoid companies that are involved in risky behaviour.  No good comes from cutting corners in any of these areas. 

The environmental criteria considers how a company performs as a steward of the environment, nature, and ecology.  It may include a company’s energy use, its waste, pollution, their exploitation of natural resource and conservation efforts, and the ethical 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.  These have a direct impact on revenue generation, and risk exposure.  Flouting environmental regulations, for example, carries the threat of fines, loss of access or property, and even jail terms for executives. 

The social criteria examines how it manages relationships with all stakeholders, from employees, suppliers, customers, all the way to the communities where it operates.  Corporate social responsibility comes under this.  Companies are expected to give back to society by sponsoring sports, welfare, and education efforts.  Health and safety standards factor as well.  This includes areas of mental as well as physical health, this factors in work environment and corporate healthcare.  This also considers other benefits such as maternity leave, a living wage, and staff welfare initiatives. 

Governance deals with a reflection of the company’s values, as seen through its leadership, and specific areas such as executive remuneration, audits, internal controls, and shareholder rights.  Investors utilising ESG criteria would be concerned about the company’s use of accurate and transparent accounting methods.  Since this is a form of activist investing, they would want a say in many policies, and be involved in voting on a variety of issues and policies at the shareholder meetings.  Ethics is a great concern in the appointment of board members and management, in the awarding of contracts, and strict compliance with the law.