Environmental Social Governance based Investing
Environmental, social, and governance (ESG) investing refers to a set of standards for a company’s behavior used by socially conscious investors to screen potential investments.
Environmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change, for example. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
ESG Investing (also known as “Socially responsible investing,” “impact investing,” and “Sustainable investing”) refers to investing which prioritizes optimal environmental, social, and governance (ESG) factors or outcomes. ESG investing is widely seen as a way of investing “sustainably” where investments are made with consideration of the environment and human wellbeing, as well as the economy. It is based upon the growing assumption that the financial performance of organizations is increasingly affected by environmental and social factors.
Greenhouse gas (GHG) emissions
Waste and pollution
Water and energy efficiency
Health and safety
Child labor and slavery
Board diversity and structure
Bribery and corruption
Political lobbying and donations
Socially Responsible Investing
Socially responsible investing (SRI), social investment, sustainable socially conscious, “green” or ethical investing, is any investment strategy which seeks to consider both financial return and social/environmental good to bring about social change regarded as positive by proponents. Socially responsible investments often constitute a small percentage of total funds invested by corporations and are riddled with obstacles.
Recently, it has also become known as “Sustainable investing” or “responsible investing”. There is also a subset of SRI known as “impact investing”, devoted to the conscious creation of social impact through investment.
In general, socially responsible investors encourage corporate practices that they believe promote environmental stewardship, consumer protection, human rights, and racial or gender diversity. Some SRIs avoid investing in businesses perceived to have negative social effects such as alcohol, tobacco, fast food, gambling, pornography, weapons, fossil fuel production or the military. The areas of concern recognized by the SRI practitioners are sometimes summarized under the heading of ESG issues: environment, social justice, and corporate governance.
Socially responsible investing is one of several related concepts and approaches that influence and, in some cases, govern how asset managers invest portfolios. The term “socially responsible investing” sometimes narrowly refers to practices that seek to avoid harm by screening companies for ESG risks before deciding whether or not they should be included in an investment portfolio. However, the term is also used more broadly to include more proactive practices such as impact investing, shareholder advocacy and community investing. According to investor Amy Domini, shareholder advocacy and community investing are pillars of socially responsible investing, while doing only negative screening is inadequate.
Some rating companies focus specifically on ESG risk ratings as they can be a “valuable tool for asset managers”. These ratings firms evaluate companies and projects on several risk factors and typically assign an aggregate score to each company or project being rated. The firms publish reports of their ESG risk findings.
Here, an investor chooses to invest in companies whose practices they approve of. For example, let’s say that an individual really cares about the environment. Then, their portfolio will probably comprise investments they’ve made in green energy.
It can also mean that the only companies they’re willing to collaborate with are those that adhere to sustainable practices. Examples of such green practices include:
- Conserving water
- Developing a recycling program at the workplace
- Purchasing energy-efficient equipment
- Enforcing eco-friendly work policies, such as asking individuals to switch off lights in rooms that are not in use.
As implied in the name, the technique involves screening a company’s practices and products and/or services before deciding to invest in it. So, if a potential investor discovers that a particular company produces harmful products such as cigarettes or engages in unethical practices, then they won’t put their money into it.