An Overview of Environmental, Social, and Governance (ESG)

Illustration by Autumn Qiu for Girls For Business

Introduction 

Environmental, social, and governance factors play an integral role in the evaluation of companies and offer a glimpse into how sustainable that organization is. Investors use this data to generate a beneficial impact on society and the environment, alongside a financial return. Environmental factors include efforts that a company has made to conserve the natural world, including documentation of carbon emissions, green energy initiatives, and waste management. Social factors concern how a company treats individuals, both inside and outside the corporation. These include employee gender and diversity, data security, and fair labor practices. Finally, governance refers to how a company operates. These factors can include whether a company has made a political contribution, how much executives get paid compared to other employees, and instances of internal corruption. Today, ESG investing has grown in popularity due to trends of increased environmental and social awareness, in addition to proven records of higher returns and lower risks. 

ESG Investing 

The term “ESG Investing” is often used interchangeably with other types of sustainable investing, namely socially responsible investing (SRI), green investing, and impact investing. However, these methods of investing have nuances. SRI refers to investments that are made by considering ethical guidelines. These guidelines include participation in controversial industries such as tobacco and gambling. Green investing involves companies that focus on environmental stewardship. These companies are actively involved in projects that mitigate issues such as climate change and provide environmentally friendly products. Impact investing is primarily focused on positive social and environmental outcomes. Unlike ESG investing, impact investing places less emphasis on shareholder returns. One can invest in both ESG funds and stocks. Many index funds, mutual funds, and ETFs, such as the iShares MSCI KLD 400 Social ETF, are dedicated to companies that implement mature ESG strategies. Investors can also research impact reports and third-party sites to invest in ESG stocks. 

ESG Reporting 

An ESG report includes qualitative and quantitative information that pertains to environmental, social, and governance practices. These reports help answer multiple questions: What is the company doing to help the environment? What is the company doing to help people’s lives? What is it doing to avoid internal corruption? ESG scores, similar to bond ratings and credit scores, evaluate how well a company is meeting its ESG commitments. These scores are calculated and assigned by third-party providers such as Bloomberg ESG Data Service and Sustainalytics ESG Risk Ratings based on a set of ESG metrics unique to each agency. There are also ESG regulations that increase sustainable investing and combat environmental degradation. The European Union (EU), for example, developed a set of ESG regulations to further the EU Green deal. This framework includes incentives for corporate governance and complete transparency into an organization’s ESG impact.