ESG » ESG 101: What is Environmental, Social and Governance?

ESG 101: What is Environmental, Social and Governance?

ESG (Environmental, Social, and Governance) criteria evaluate a company's impact on the environment, society, and governance, with increasing importance for investors.

Environmental, social, and governance (ESG) is a set of criteria used to evaluate a company’s impact on the environment, society, and its governance practices. This approach is used by investors to determine which companies align with their values and to assess a company’s long-term viability. In this article, we will provide an overview of ESG, its importance and how it is used by investors.

Understanding ESG

The three key components of ESG are environmental, social and governance. Environmental factors relate to how a company interacts with the environment and its efforts to reduce its carbon footprint, energy usage, and waste production. Social factors relate to how a company interacts with its stakeholders, including its employees, customers, and local communities. Governance factors relate to how a company is managed and governed, including its leadership, transparency, and ethics.

The importance of ESG

Investors are increasingly focused on ESG, as they recognise that companies that are committed to sustainability and responsible practices are more likely to be successful in the long-term. By prioritising ESG factors, investors can evaluate the risks and opportunities associated with a company’s business practices, as well as the potential impact of their investments on the environment and society.

In addition, ESG investing is becoming more popular as investors become more interested in aligning their investments with their values. ESG investing provides an opportunity to invest in companies that are committed to positive environmental, social and governance practices, whilst avoiding companies that are deemed to be harmful or unethical.

How ESG is used by investors

ESG is used by investors in a variety of ways. Firstly, ESG ratings can be used to evaluate a company’s environmental, social and governance practices. These ratings are typically provided by third-party providers, who evaluate companies on a range of criteria, such as greenhouse gas emissions, labour practices and board diversity. ESG ratings can help investors to identify companies that align with their values and to assess the risks and opportunities associated with their investments.

Secondly, ESG can be used to guide investment decisions. Investors may choose to prioritise investments in companies that are committed to positive environmental, social and governance practices, whilst avoiding investments in companies that are deemed to be harmful or unethical. This approach is becoming increasingly popular, as investors recognise the potential for companies that prioritise sustainability and responsible practices to be successful in the long-term.

Thirdly, ESG can be used to engage with companies on sustainability and responsible practices. Investors may use their shareholder rights to engage with companies on ESG issues, such as requesting greater transparency on a company’s environmental impact or lobbying for improvements in labour practices. By engaging with companies on ESG issues, investors can encourage positive change and promote sustainability and responsible practices.

ESG is increasingly important

In conclusion, ESG is becoming an increasingly important consideration for investors, as they recognise the potential benefits of investing in companies that prioritise sustainability and responsible practices. ESG can be used to evaluate a company’s environmental, social and governance practices, guide investment decisions and engage with companies on sustainability and responsible practices. By prioritising ESG factors, investors can promote positive change and support companies that are committed to sustainability and responsible practices.

The future of ESG

Looking to the future, it is clear that ESG will continue to be a critical consideration for investors. In recent years, ESG investing has grown in popularity, with a greater focus on sustainability and responsible practices. This has been driven in part by increased awareness of the risks associated with climate change, as well as greater scrutiny of business practices and a growing desire to invest in companies that align with investors’ values.

As the importance of ESG grows, it is likely that investors will place greater emphasis on ESG ratings and metrics,

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