ESG stands for Environmental, Social, and Governance. It is a framework used by investors, companies, and regulatory bodies to evaluate how a business operates within the broader social and ecological context.
ESG criteria help to assess the sustainability and ethical impact of an investment in a company or business. These factors are increasingly used to evaluate potential risks and growth opportunities, beyond traditional financial metrics.
Environmental Criteria
This aspect of ESG focuses on how a company performs as a steward of nature. It includes the management of environmental risks and the company’s impact on the environment. Here are key points to consider:
- Climate Change and Carbon Emissions: Evaluating a company's emissions footprint and their initiatives to reduce carbon emissions.
- Resource Depletion: Assessing how a company uses resources like water, energy, and raw materials, and their efforts in recycling or using renewable resources.
- Waste and Pollution: Monitoring how the company manages waste production and its strategies for waste reduction, recycling, and disposal.
- Deforestation: Assessing impacts on forests due to business operations, especially for companies in agriculture or manufacturing.
- Biodiversity: Companies' efforts to protect biodiversity in areas where they operate.
Social Criteria
This section examines how a company manages relationships with employees, suppliers, customers, and communities where it operates. It includes:
- Employee Relations and Diversity: Practices related to employee treatment, diversity, and inclusion. This also includes fair wage practices and labor standards.
- Human Rights: The company’s commitment and adherence to human rights and avoiding complicity in human rights abuses.
- Consumer Protection: Focus on product safety, data protection, and privacy practices.
- Community Relations: How companies interact with the communities in which they operate, including community engagement, philanthropy, and impact mitigation.
- Health and Safety: Ensuring safe working conditions and health standards in the workplace.
Governance Criteria
Governance deals with a company’s leadership, audits, internal controls, and shareholder rights. Important aspects include:
- Board Composition: Diversity, independence, and structure of the board.
- Audit and Risk: How a company manages risks, including financial, reputational, and operational, and the effectiveness of their internal controls and audits.
- Executive Compensation: Whether the top executives’ compensation is aligned with the company’s long-term goals and shareholders' interests.
- Corruption and Bribery: Measures in place to prevent corruption and bribery.
- Political Contributions: Transparency about political contributions and lobbying activities.