Investors with a strong sense of social responsibility often utilize environmental, social, and governance (ESG) factors to narrow their investment options. Companies are evaluated on their environmental protection measures, such as their climate change policy. The company’s relationship management with its staff, vendors, consumers, and local communities are all evaluated using social criteria. Governance is concerned with a company’s management, executive compensation, audits, internal controls, and shareholder rights.
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How Environmental, Social, and Governance (ESG) Criteria Work
In recent years, investors have shown a desire to put their money where their ideals lie.
Brokerage houses and mutual fund providers have responded by introducing exchange-traded funds (ETFs) and other financial products that adhere to environmental, social, and governance (ESG) standards. These ESG-focused investments have been marketed to younger investors by Robo-advisors like Betterment and Wealthfront.
Large institutional investors, such as public pension funds, are also increasingly using ESG factors to guide their investment decisions. Last year, investors held $12 trillion in assets selected based on ESG criteria; by the end of 2019, that number had increased to $17.1 trillion, per the latest study from the US Sustainable Investment and Finance.
Sustainable investing, responsible investing, impact investing, and socially responsible investing are all names for ESG investing (SRI). Investors consider a variety of practices and policies when doing an ESG assessment of a company.
Types of Environmental, Social, and Governance (ESG) Criteria
ESG investors look for signs that the businesses they support are ethical in their operations, respectful of their communities, and led by transparent executives.
Company climate policy, energy consumption, waste production, pollution levels, natural resource preservation, and animal welfare are all examples of environmental requirements. The criteria can also be used to assess the environmental hazards a firm faces and the efficacy of the measures it has put in place to deal with them.
Greenhouse gas emissions (both direct and indirect), toxic waste management, and environmental law compliance are all possible factors.
Social
The social criterion investigates the way the company interacts with its constituents.
Does it insist that its vendors meet its ESG criteria? Does the company give back to the community by donating a portion of its earnings or by encouraging employees to volunteer their time there?
Is there a high priority on worker safety and health in your workplace? Alternatively, do clients feel like they’re being exploited by the company?
Governance
Accounting accuracy, leadership diversity, and shareholder accountability are all aspects of corporate responsibility that can be improved by adhering to ESG governance principles.
To reassure ESG investors, businesses may need to demonstrate that they avoid conflicts of interest when selecting board members and top executives, don’t make unlawful payments to politicians, and don’t engage in other questionable practices.
Factors to Take Into Account
Following ESG principles, investment firms often determine their own goals. To find companies poised for good long-term performance, Trillium Asset Management, based in Boston and managing $5.6 billion as of December 2021, considers a wide range of environmental, social, and governance (ESG) issues.
Analysts determine the criteria by identifying the problems that have an impact on particular markets, industries, and businesses. Investments in the following do not meet Trillium’s ESG criteria
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