ESG Investments and its Benefits
What Is Environmental, Social, and Governance (ESG) Investing?
A set of criteria for a company’s conduct known as environmental, social, and governance (ESG) investing is used by socially responsible investors to evaluate possible investments.
Environmental criteria take into account a company’s environmental protection efforts, including any corporate climate change initiatives. The management of connections with customers, suppliers,workers, and the communities in which it works is examined under the social criteria. Leadership, executive compensation, audits, internal controls, and shareholder rights are all topics covered under governance.
How does Environmental, Social, and Governance (ESG) Investing Work?
In recent years, investors have demonstrated an interest in having a financial goal where these values exist. As a result, brokerage firms and large fund houses now offer exchange-traded funds (ETFs) and other financial products that adhere to ESG investment principles. ESG investment is also known as responsible investing, impact investing, sustainable investing, and socially responsible investing (SRI). Investors evaluate a firm using a wide range of practices and policies to see how it performs in terms of ESG.
Environmental, Social, and Governance
ESG investors seek to ensure the companies they fund are responsible stewards of the environment, good corporate citizens, and are led by accountable managers.
Environmental
ESG factors may also be used to assess any potential environmental concerns a business may face and how it is addressing those risks.
Social
The company’s ties with internal and external stakeholders are examined through social factors.
Does it enforce its ESG requirements on its suppliers? Do working circumstances show great respect for the health and safety of employees? This particular aspect of ESG is highlighted by the investment approach known as socially responsible investing (SRI).
Governance
ESG governance guidelines make that a business employs correct and open accounting practices, selects its executives with integrity and diversity in mind, and is answerable to shareholders.
ESG Criteria
Investment companies that use ESG investing frequently have their own goals. For instance, Trillium Asset Management, located in Boston, examines a range of ESG indicators to identify businesses that are well-positioned for long-term success.
Analysts determine the pertinent problems affecting certain sectors, industries, and businesses to create the criteria.
The following investments are prohibited under Trillium’s ESG criteria:
1. Businesses that are exposed to coal or hard rock mining, nuclear or coal power, private prisons, agricultural biotechnology, tobacco, tar sands, weapons, and guns, or located in high-risk locations.
2. Organizations embroiled in significant or recent disputes involving animal welfare, human rights, the environment, corporate governance, or product safety.
Trillium, in contrast, seeks investments that adhere to the following ESG standards:
Environment
1. Releases a sustainability or carbon report
2. restricts dangerous chemicals and contaminants
3. aims to reduce carbon footprint and greenhouse gas emissions
4. Makes use of renewable energy
5. minimizes waste
Social
1. Runs a morally-sound supply chain
2. Supports LGBTQ+ rights and promotes all types of diversity by avoiding foreign labor that can use
child labor or have dubious workplace safety
3. Has measures in place to prevent sexual misbehavior
4. Offers fair (living) pay
Governance
1. Supports a diverse board of directors
2. Supports corporate openness
3. The board’s chairperson is not the CEO
4. Disparate board election dates
How Is ESG Investing Different from Sustainable Investing?
Sustainability and ESG are closely connected. ESG investment evaluates businesses based on
standards for strong corporate governance, environmental responsibility, and pro-social behavior. When combined, these qualities can promote sustainability. ESG then examines how a company’s management and stakeholders make decisions, while sustainability considers how those decisions affect the global environment.
What Does ESG Mean for a Business?
When a company adopts ESG principles, its business strategy is centered on the three pillars of
environment, social responsibility, and good governance. This entails adopting actions to lessen
waste production, pollution, and CO2 generation. Additionally, it entails having an inclusive and
diverse staff, from entry-level employees to the board of directors. ESG may be expensive and time-consuming to implement, but it may also pay off in the long run for those that see it through.
Benefits
1. A more sustainable and healthy world
2. Increased Returns
3. Reduced Risk
Please consult your financial advisors for ESG related investments, as the concept is relatively new and the risks involved are high.
The Nike Turnaround story
Have you heard the story of Nike’s shameful story of labor malpractices? It wasn’t that long ago that Nike was being shamed in public for its labor practices to the point where it badly tarnished the company’s image and hurt sales. Its business model was based on outsourcing its manufacturing, using the money it saved on aggressive marketing campaigns.
It has faced global boycotts, and protests because of sub-standard factory and labor conditions at a few of its outsourced manufacturing units.
Nike has managed to turn its image around. Nike hasn’t been completely successful in bringing factories into line, but there’s no denying that the company has executed one of the greatest image turnarounds in recent decades.
Today, Nike’s ESG impact score is one of the highest in the industry at 76. The parameters
considered to arrive at this score are as under;
1. Accountable institutions
2. Climate action
3. Decent, safe work opportunities
4. Disaster readiness and effective aid
5. Equal pay and opportunity
Please refer to the link to check ESG score of various companies across the globe -
https://www.ethosesg.com/companies/396