Environmental Social Governance (ESG) Investing

A brief introduction to ESG investing and its priorities

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ESG Investing (also referred to as sustainable investing) is receiving greater attention these days, though it isn’t a new investment concept. ESG criteria are “a set of standards for a company’s operations that socially conscious investors use to screen potential investments” (Investopedia.com, 2020).

Environmental pertains to how a company treats the environment. For example, an oil company is depleting the earth’s natural resources and not practicing environmentally friendly techniques. Such a company would not qualify in a fund applying an environmental screen.

Social relates to a company’s treatment of employees, suppliers, customers, and communities where it is operating. By practicing social responsibilities, companies would offer equal pay, good working conditions, fair treatment, good customer service, etc. A good disqualifier would be companies that have cheap laborers in sweatshops continents away.

Lastly, governance deals with leadership within a company. A company that fits this criteria will emphasize shareholders’ rights, representation on the board and in the executive offices of women and minorities, and fair (i.e., not excessive) executive pay.

What is interesting from an investment perspective is that such companies are performing every bit as well as companies not providing such standards. The concerns of higher business costs or mandates on having a broad representation of genders and races within a company aren’t hurting corporate performance. The forces of simply promoting “forces for good” and the fact that there is increased demand by investors of the shares of such companies is helping promote growth in value.

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-RR