Environmental, Social, and Governance (ESG)
ESG is the criteria used to set standards for a company’s operations that socially conscious investors use to screen potential investments. A recent Black Rock article suggested that Black Rock would be making a shift in its portfolios to only consider companies that supported or followed environmental criteria, and is consider by how the company performs as a steward of nature, social criteria examines how they manage relationships with employees, suppliers, customers, and the communities and governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
Environmental Criteria
The criteria includes a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks. For example, are there issues related to its ownership of contaminated land, its disposal of hazardous waste, its management of toxic emissions, or its compliance with government environmental regulations?
Social Criteria
Look at the company’s business relationships. Does it work with suppliers that hold the same values as it claims to hold? Does the company donate a percentage of its profits to the local community or encourage employees to perform volunteer work there? Do the company’s working conditions show high regard for its employees’ health and safety? Are other stakeholders’ interests taken into account?
Governance Criteria
Investors may want to know that a company uses accurate and transparent accounting methods and that stockholders are given an opportunity to vote on important issues. They may also want assurances that companies avoid conflicts of interest in their choice of board members, don’t use political contributions to obtain unduly favorable treatment and, of course, don’t engage in illegal practices.
Summary
No single company may pass every test in every category, of course, so investors need to decide what’s most important to them. On a practical level, investment firms that follow ESG criteria must also set priorities.
ESG criteria is to provide guidance to avoid companies whose practices could signal a risk factor, evidence of scandal, environmental, social or governance damage will rock the companies’ stock prices and may result in billions of dollars in associated losses.
As ESG-minded business practices gain more traction, investment firms are increasingly tracking their performance and have published annual reports that extensively review their ESG approaches and the bottom-line results.