ESG is the application of socially aware and responsible standards centered on the environment, society, and internal governance.
ESG investment refers to an investment strategy which seeks equivalent or higher returns while simultaneously making a positive impact in three areas: environmental, social and governance
According to the U.S. SEC:
- The environmental factor might focus on a company’s impact on the environment, or the risks and opportunities associated with the impacts of climate change on the company, its business and its industry.
- The social factor might focus on the company’s relationship with people and society, or whether the company invests in its community.
- The governance factor might focus on issues such as how the company is run and executive compensation.
Investors, especially institutional investors, have increasingly focused on the ESG aspects of their investments from a mixture of concern, profit, and regulatory pressure. This emphasis has in turn put pressure on investment recipients to conform with ESG standards in a reportable manner.
Environment – too often viewed solely as energy consumption/emissions addressable by decarbonizing. Environment refers to the entirety of the environment including air/water/sound pollution, energy consumption, ecological features, and aesthetics.
Social – refers to the human factors such as labor standards, workplace health & safety, local community involvement/benefits/impacts. It can be as simple as providing nutritional advice to tenants to economic development for the local community.
Governance – referring to the entity’s internal governance practices – is ESG a recognized standard, are there internal rules for ESG measurements and compliance, what is the level of commitment – an analysist or the C-Suite.
Why ESG / Sustainability
The simplest answer is that sustainability is necessary to the survival of civilization and perhaps humanity. Pretentious sounding but the UN estimates that humanity is consuming the equivalent of 1.6 planets. In other words, in the seven months from January 2022 to July 2022 humanity consumed all the biological resources that the Earth regenerates over the entire year. And as a purely financial matter, it’s also good business reducing costs and increasing profits to be explained in future posts.