CSR-Wiki
Environmental, Social, and Governance (ESG)
Overview
Environmental, Social, and Governance (ESG) refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business. These criteria help to better determine the future financial performance of companies (return and risk). ESG factors are a subset of non-financial performance indicators which include ethical, sustainable, and corporate governance issues such as managing a company’s carbon footprint and ensuring there are systems in place to ensure accountability.
History
The concept of ESG was born from the understanding that traditional financial metrics do not fully capture a company’s impact on the world. The idea emerged in the early 2000s, with growing interest from investors in incorporating these non-financial factors into their analysis process to identify material risks and growth opportunities.
Components
Environmental
This component considers how a company performs as a steward of nature. It includes energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also help evaluate any environmental risks a company might face and how the company is managing those risks.
Social
This aspect examines how it manages relationships with employees, suppliers, customers, and the communities where it operates. 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?
Governance
Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights. How a company is governed, its tax strategy, its corruption and bribery record, and the structure of its board are all part of its governance.
Importance
In recent years, ESG criteria have become a significant point of focus for investors and companies alike. The increasing recognition that ESG factors can materially affect a company’s performance and market value is a primary driver of this focus. Additionally, consumer awareness and societal changes are motivating companies to consider their roles in larger societal and environmental contexts.
Challenges and Future Directions
One of the main challenges in ESG investing is the lack of standardized, comparable data, as companies often report on ESG criteria in varied ways. The future of ESG lies in the development of standardized reporting frameworks that make it easier for investors to compare companies based on these non-financial factors. The integration of ESG factors into company strategies and investment decisions is expected to continue growing, as these factors become increasingly relevant to a company’s long-term success.