What is ESG?

So what is ESG? Environmental, Social, and Governance (ESG) are the three central factors that allow investors to measure the sustainability and societal impact of an investment in a company.

In the past, our principal concern as investors was whether a company in which we invested was able to provide us with a capital gain and dividends over time, without any reference to matters of sustainability or corporate responsibility. More recently, however, environmental, social, and governance (ESG) criteria have become additional, increasingly important considerations for investors when evaluating companies in which they might want to invest.

So what are these criteria and why are they important?

Environmental criteria demonstrate how a company performs as a steward of the environment. These will include, among others, measures of energy use and the size of a company’s carbon footprint, the volume and type of waste and any pollution that it may produce and its consumption and depletion of natural resources.

Social criteria demonstrate how a company treats people, especially its own staff, and how it interacts with the communities it serves. Items of note will include the way a company treats its suppliers, does it contribute to the development of local communities, do the company’s working conditions show regard for the development and health and safety of its employees.

Governance criteria demonstrate, among other things, how a company is governed, whether there are any conflicts of interest among its board members, how it treats its shareholders and the legality and nature of its operations.

These environmental, social, and governance (ESG) criteria are formulated to help investors find companies with similar values to their own. Although there are unlikely to be any companies which will pass every test, it is important that investors are provided with sufficient information for them to decide what is most important to them, and to assist them in making their investment decisions.