ESG stands for Environmental, Social, and Governance, which are the three central factors in measuring the sustainability and societal impact of an investment in a company or business. These criteria help investors evaluate how a company is managing risks and opportunities related to environmental, social, and governance issues. Here’s a breakdown of each component:
- Environmental: This criterion examines how a company performs as a steward of nature. It includes factors like:
- Climate change and carbon emissions
- Air and water pollution
- Biodiversity
- Energy efficiency
- Waste management
- Water scarcity
- Social: This criterion looks at how the company manages relationships with employees, suppliers, customers, and the communities where it operates. It includes:
- Labor standards
- Employee engagement
- Diversity and inclusion
- Human rights
- Community relations
- Customer satisfaction
- Governance: This criterion deals with the leadership and structure of the company. It includes:
- Board composition and structure
- Executive compensation
- Corruption and bribery
- Lobbying
- Political contributions
- Whistleblower schemes
Investors use ESG criteria to screen potential investments or to better understand the overall risk and opportunity profile of their existing investments. Companies that score high on ESG criteria are often seen as more sustainable and potentially more financially viable in the long term.