ESG

What Is ESG in Terms of Investing?

ESG stands for Environmental, Social, and Governance, three central factors used to measure the sustainability and ethical impact of an investment in a company or business. These criteria help to better determine the future financial performance of companies (return and risk).

Here's a bit more detail about each of the components of ESG:

Environmental: This involves a company's impact on the environment, and how the company is managing risks related to the environment. It can include things like a company's energy use, waste, pollution, natural resource conservation, and treatment of animals. Companies that make a positive impact on the environment or are improving in these areas may be seen as more appealing to certain investors.

Social: This involves how a company manages its relationships with employees, suppliers, customers, and the communities where it operates. It might consider the company's business relationships, working conditions, employee relations and diversity, and impact on local communities. Companies with strong social relations can be seen as more responsible and sustainable.

Governance: This involves a company's leadership, executive pay, audits, internal controls, and shareholder rights. It could also cover issues such as corruption, political contributions, and tax strategy. Companies that have good governance policies are viewed as being lower risk and more stable.

Investors who focus on ESG factors believe that these aspects can provide important insights about a company's management, culture, risk profile, and other characteristics that might not be captured in a traditional financial analysis. Therefore, ESG investing aims to identify companies that could be better positioned for long-term performance due to their positive ESG practices.

ESG investing is growing in popularity as more investors seek to align their investments with their personal values, or because they believe that companies that prioritize ESG factors may be more financially successful in the long term. It's part of a broader movement toward sustainable investing, aiming for a sustainable and inclusive approach to economic growth.