What is ESG investing?
ESG stands for environmental, social and governance. ESG investing is how organisations score on these responsibility metrics and standards for potential investments. Let’s break this down.
The ‘E’
Environmental criteria gauges how a company protects the natural World. Investors evaluate climate policy, energy usage, waste, pollution, natural resource conservation and the treatment of animals. When measuring greenhouse gas emissions, investors consider both direct and indirect emissions. Examples of indirect emissions include purchased electricity, waste disposal and business travel.
The ‘S’
Social criteria evaluate how an organisation maintains its relationships with employers, customers, suppliers and the community. For example, does the company donate a percentage of profits to the local community or encourage employees to volunteer? Is health and safety high on the agenda?
The ‘G’
Governance measures a company’s leadership, executive pay, audits, internal controls, and shareholder rights. ESG investors may require assurances that companies avoid conflicts of interest in their choice of board members and senior executives and don’t use political input.
Things to bear in mind before you invest
The value of investments can rise and fall so you won’t always get back what you invested.
Investing goes beyond logic. Make sure your investment aligns with your goals and personal values.
Different companies may feature in different ESG funds. Also, a company may be removed from an ESG fund due to poor business practices but reinstated when the issues are resolved.
What is the difference between ESG and SRI?
ESG came into existence through investment philosophies such as Socially Responsible Investing (SRI), though there are important differences.
Earlier models typically use value judgements and negative screening to analyse what organisations to invest in. ESG investing and analysis, however, focuses on identifying value in companies, and not just supporting a set of values.
Closing thoughts
People often have different values and motivations for investing. It’s important to invest in the right funds for you. We’d be happy to discuss your investment options with you.