By Giulia Pincetti (’24)
A company’s operations are set to a specific standard of criteria environmentally, socially and when it comes to governance. This is called ESG, and socially aware investors use this criteria in order to find potential investments that align with their values. Many investors may even use ESG to steer away from businesses that contain risk factors that may damage their share hold value, cause scandals, or money losses. ESG ratings are becoming a growing awareness of the long term performance of a company. Many mutual funds, brokerage firms, and robo-advisors are more likely to push for products that follow this criteria.
What exactly is the ESG criteria evaluating? The environmental criteria considers the business’s awareness and cooperation with the surrounding nature. This includes its pollution and waste rates, how it depletes resources-causing deforestation for example. It also monitors how businesses affect the climate and carbon emissions when using energy. The social criteria involves examining how relationships are being managed with suppliers, communities, and in general, the reputation that businesses flourish with people and institutes encompassed in the company.
Governance, on the other hand, focuses on how a company shows leadership and exposes a company’s policies, allowing investors to see a company’s unsound legal and ethical practices. If a company is transparent about their policies and practices when an investor is screening the company, the results are more likely to be positive. An example of negative governance is when Volkswagen cheated on their emission tests for 11 million diesel cars in 2015 and their stock market crashed from the civil penalties and criminal expenses.
About a quarter of all the professionally managed funds in the world use ESG when investing and it is becoming an increasing awareness as it is a great indication of how companies will do in the long term and the risk and return investors are buying into. It is also a great way to make sure that companies aren’t overlooking the small impactful things they do everyday that affect the world around their business. Whether that’s child labor or employee diversity, ESG has increased awarness towards risks by identifying them, not allowing for them to be brushed off the table for tomorrow.
In conclusion, when investing, look into a company’s ESG and make sure that they are not damaging society instead of helping it flourish. Most companies may not pass every category with stellar marks but make sure that your most important values align with theirs to ensure you’ll be happy with their work. ESG also eliminates a lot of the risk factors, and removes unworthy options that may get you in trouble in the future. Protect your wallet and the world, and make sure to look into ESG before investing!