What is ESG?
ESG is a trending term these days, but it is not trendy. ESG is here to stay. It is crucial to understand the term, concept, and practicality for your company and your investment needs. ESG is a set of non-financial standards that socially conscious investors use to screen and identify potential investments.
ESG stands for Environmental, Social and Governance. In some ways, ESG includes the community relations components of yesteryear but now combined with metrics drilled down further on critical issues.
To begin with, what do E, S, and G mean?
Environmental: how the actions of a company’s operations impact the environment. It can include a company’s energy use, waste, and pollution. This metric may look at how a company uses renewable energy, employs green technologies, and abates its carbon footprint. A company’s sustainability report will provide this information. Additionally, many companies employ Chief Sustainability Officers whose role includes ensuring the company meets its sustainability goals for investors, employees, and the community.
Social: how a company engages with key stakeholders including employees, suppliers, customers, and the communities in which they work. It can include the company’s supplier relationships, donations to the community, and volunteer hours. This metric may include employee pay and benefits, diversity and inclusion, and customer service. A potential investor may look at the company’s corporate citizen report to find this information.
Governance: a company’s internal controls including legal compliance, regulatory and how management works with internal and external stakeholders. It can include the company’s accounting methods, proxy access, and board conflicts of interest. This metric may include board diversity, executive bonuses, and transparency with stakeholder communications. A savvy investor can find much of this information in the annual proxy statements.
While ESG is not part of mandatory reporting, it is critical to include these metrics in a company’s annual report or sustainability report. Standardized reporting by companies and finding the pertinent information by investors has been difficult. However, the International Financial Reporting Standards (IFRS) Foundation has signaled it may create a single international ESG standard. Uniform standards would be beneficial for all.
ESG can lead to responsible investing, not only for investors but encouraging companies to lead responsibly. Whether within the environment, communities, or as part of board policies, ESG is helpful for all.