What is ESG?
ESG stands for Environmental, Social, and Governance. These three factors are used to measure the sustainability and societal impact of a company or business. They help in determining the future financial performance of companies, especially in industries that are sensitive to these issues.
The Environmental Aspect
The 'E' in ESG, stands for Environmental. This factor looks at how a company performs as a steward of the natural environment. It includes a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The metrics also take into account the environmental risks a company might face and how the company is managing those risks. For example, a company might face regulatory action if it’s not in compliance with environmental laws.
The Social Aspect
The 'S' in ESG, stands for Social. This factor deals with how a company manages relationships with its employees, suppliers, customers, and the communities where it operates. It includes the company’s business relationships, working conditions, health and safety, and how it interacts with the wider community. A good social record indicates a company’s strength in terms of public perception and customer loyalty.
The Governance Aspect
The 'G' in ESG, stands for Governance. This factor involves a company’s leadership, audits, internal controls, shareholder rights, and transparency about corporate governance. It’s about making sure that companies are run in a way that’s fair, transparent, and accountable. A company with good governance is more likely to be trusted by investors and stakeholders.
Why is ESG important?
ESG factors are becoming increasingly important to investors. Many are now looking at a company’s ESG performance when deciding where to invest. They believe that companies with strong ESG credentials are better long-term bets. Research has shown that companies with strong ESG performance have lower cost of capital, better operational performance, and lower share price volatility.
ESG and the future
ESG is not just a trend, it’s a shift in how businesses operate and investors invest. It’s a recognition that companies can no longer focus solely on profits, but must also consider their impact on the world. As we move towards a more sustainable future, ESG will continue to play a vital role in shaping the business landscape.