Environmental, social and governance (ESG) is a set of standards for how a company operates in regard to the planet and its people. ESG become more important now because many investors now will use ESG criteria to screen potential investments. ESG and sustainability are two popular terms that are floated around the corporate sphere.
Environmental criteria (E)
Environmental criteria include a company’s energy use, the waste and pollution it creates, how it conserves natural resources, and the way it treats animals.
The criteria are often used in evaluating any environmental risks a company may face and how the company is managing those risks. For example, does it own contaminated land? How does it dispose of hazardous waste? How does it manage toxic emissions, and how does it comply with environmental regulations?
Social criteria (S)
Social criteria examine the company’s business relationships. Does the company have a high regard for employee health and safety? Does the company allocate a percentage of its profits to its local community? Do company employees engage in volunteer work? Are other stakeholders’ interests taken into account?
Governance (G)
Investors looking at a company’s ESG will want to see that it is accurate and transparent in its accounting and reporting methods. Investors will also look at how a company treats its shareholders and their right to vote on important issues. Investors will seek assurances that
the company doesn’t engage in illegal practices and avoids conflicts of interest when it chooses its board members.
Investors now understand that environmental, social, and governance criteria go beyond ethical concerns. With robust ESG criteria, companies can avoid practices that involve risk. Investors and investment firms look for ESG-minded companies and financial services companies like Goldman Sachs and JPMorgan Chase now publish annual reports that review the ESG approaches of various companies.