Business malpractices are pretty hard to be swept under the rug any longer. Moreover, pursuing positive changes has gripped the world recently as the world increasingly faces environmental and sustainability concerns.
Recently, ESG investments were pushed into the limelight after the Senate voted to overturn a Labor Department rule that permits fiduciary retirement fund managers to consider ESG factors in their investment decisions. President Joe Biden said that he would veto the bill when it reached his desk.
Republicans have criticized ESG as being “woke” capitalism and that it reflects liberal political beliefs. But what exactly is ESG? And how can one use it in investing? Let us delve deeper to answer these questions.
What Is ESG?
ESG stands for Environmental, Social, and Governance, which essentially refers to a certain set of rules a company must follow to comply with standards in the light of socially helpful issues such as climate change and sustainability.
Environmental: The ‘E’ in ESG takes care of the company’s responsibility toward the environment. The company’s operations that can impact the environment, like sourcing natural resources and waste disposal, also have the ability to impose financial risks. Companies that fail to take responsibility for the environment can face regulatory risks, prosecution, and loss of reputation, which can impact shareholder returns.
Social: The ‘S’ refers to social responsibility, encompassing companies’ interaction with their employees and in the community where their operations lie. DEI (Diversity, Equity, and Inclusion) is a crucial component of the social factor. However, this factor is hard to measure as investors have to rely upon the information provided by management and distinct methodologies.
Governance: The ‘G’ implies the company’s governance and decision-making tactics. This reflects how company participants implement social and environmental values into policy making. This criterion relates to the assurance that a company is not engaged in unlawful activities that conflict with shareholders’ interests.
ESG Measurement: ESG activities can be objectively measured by an ESG score. MSCI rates companies on an AAA-CCC scale relative to the standards and performance of their industry peers, considering 10 themes and 35 key ESG issues. The MSCI model asks four key questions: Continue reading "What Is ESG Investing?"