What is Environment, Social, and Governance?

Environmental, social and governance (ESG) refers to the three central factors in measuring the sustainability and ethical impact of an investment in a company or business.

Responsible investing means that we take responsibility for the investment decisions made by us on behalf of others. To do this, we must better understand all of the risks and opportunities that our investments are exposed to. This is why so many investors now take environmental “E”, social “S” and corporate governance “G”,  ESG, into account, because these issues are now affecting the value of investments more than ever before.

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All investors are seeking to reduce risk, gain above average investment returns, and access opportunities in the new sustainable economy. Smart investors are now factoring ESG into their decisions, because many ESG issues can now be quantified and priced into financial models.

Owning stock in a company means you are an owner of that business. As recent events tell us, if this business is engaged in risky practices, poor safety, environmental accidents, child labor, or governance failures, the stock price of this company can be affected and as a shareholder you'll be affected too.

Poor performance in ESG represents a serious competitive issue for modern corporations. From fines for environmental destruction, to restrictive regulations, low staff morale, and consumer backlash.

ESG now affects share price.

So what does it mean to take ESG issues into account when making investment decisions? Well, when analyzing companies in constructing investment portfolios, responsible investors always look at 

the environmental performance:

  • does this company understand its environmental risks and is it gearing up to take advantage of the new green economy?

social performance:

  • is the company good at human capital management?

  • safety

  • human rights and understanding the communities in which it operates

thirdly,  governance:

  • responsible investors know that companies that are well managed

  • transparent and in tune with the expectations of society are bound to be better investments

Responsible investment is about getting more information and better information about what's really driving company value in the twenty-first century.

Source: RI Academy