Despite its growing popularity, ESG is a relatively complex strategy. Those who aren’t yet familiar with it may have several questions as they search for more information.

What are ESG principles? What do they cover? Why do I need to know?

Our guide provides the answers to these questions and more. Read on to learn the principles that guide ESG and how to use them when investing in and/or running a business.

What Is ESG?

Developing a proper ESG definition is the first step in using these helpful policies as a businessman, investor, or other interested party. It’s impossible to use unless you understand it fully.

The best way to start is by examining the title more closely. ESG is an acronym that stands for environmental, social, and governance. It provides a set of standards used to evaluate a company’s external and internal policies.

Several companies provide ESG ratings to let organizations and potential investors know how well they’re doing. They consider several principles to deliver an overall score. This affects a company’s public image and how well they’ll perform.

There are other forms of sustainable investment, including SRI and impact. They all consider an organization’s inner workings and policies but differ in what they focus on and how they consider including or excluding a company from an investment portfolio.

ESG is a complete strategy with several components, and knowing them all is the best way to get the most benefits. Find out everything you need to know about ESG here.

What Are ESG Principles?

It’s impossible to measure an organization in regards to ESG without a set of factors and considerations to rate them on. These principles fall into three main categories; environmental, social, and governance.

Environmental principles cover a company’s impact on the earth. Examples include energy use, waste management, and resource use. ESG also considers how a company works to reduce any potential risks through environmentally conscious policies.

Social principles consider every party a company may have a relationship with. This includes customers, shareholders, suppliers, and the surrounding community.

Governance principles focus on the internal operations of the company. This includes things like leadership, pay rates, audits, and whether everyone’s rights are observed.

There’s no exhaustive list of ESG principles and few regulations about which ones you’re required to consider. Anything that affects a company’s environmental, social, and/or governance policies can and should be included.

Working to get the highest ESG rating possible is the best policy. There are several ways to improve environmental, social, and government aspects. Whether it’s using more sustainable materials, hiring a more diverse workforce, or enacting fairer pay rates, the changes will provide worthwhile benefits.

Despite the large variety of principles to choose from, it’s best to choose the ones that are the most important to your organization. Think of what type of business you have, what it does, and what parts of the world it most affects. Focus on what you can do to improve the way you get tasks done and how the public sees you.

No matter what you decide to focus on, ESG provides several potential benefits for you, your investors, and your customers.

ESG Investing

$30.7 trillion worth of business assets are managed under ESG. A large portion of modern investments use the policy, and its worth is only expected to grow.

This growth provides several opportunities for investors. It provides them with a wealth of information about a company they can use to evaluate it before they even consider spending a cent.

The principles of ESG are a useful way to evaluate a company. They provide information about its impact on the environment and the world as a whole while indicating how well it will do financially.

A high ESG rating makes a company more attractive to investors, especially younger, more environmentally conscious ones.

There are over 75 million Millenials 26-40 years old in the US alone. A 2017 study showed that 86% of the members of this generation are interested in sustainable investing and 28% are very interested. Considering ESG principles is one of the best ways to reach this growing sector.

Regardless of their age, data shows that 87% of customers want to buy from a brand that shares the same values and cares about the same issues they do. ESG principles show what’s important to a company and prove that their policies match up with what they claim to believe in.

There are also financial benefits to keeping ESG principles in mind. Firms with higher ESG ratings often yield higher returns. They also have lower market risk and experience less loss of capital thanks to stable earnings.

The way a business manages the principles of ESG determines how attractive it becomes to investors and therefore affects how well they’ll perform financially. Learn the factors behind the growth of ESG investing here.

Why You Should Know How ESG Works

If you want to invest and/or do business in a responsible, ethical way, you need to follow a strategy. ESG is one of the best, but to use it, you must know the answers to several important questions.

What are ESG principles? How can I use them? Why should I?

There are several ESG principles to consider relating to the three components known as environment, social, and governance. Focusing on a few of the most crucial leads to a better rating, which presents a better image to potential customers, investors, and partners.

Modern investors are starting their journey at a young age and want to find companies that respect and exemplify the values they hold dear. A company with a high ESG rating instantly becomes more attractive to them.

Considering the right ESG principles also benefits businesses. They’ll perform better, gain a better reputation, and enjoy several other benefits.

We provide a variety of information on how ESG works for anyone who may be affected by it. Learn how we can help and contact us today for more information.

You may have questions, like what does ESG stand for, and what makes an effective ESG policy.

Keep reading to learn everything you could ever want to know about ESG standards and why you need to implement them in your business.

What Is ESG?

The ESG acronym stands for environmental, social, and governance. ESG standards are used to rate businesses on how well they monitor emissions, governance, human rights, and other factors.

There are several rating companies that let companies know how well their ESG policy is working. It’s important to know the differences between them.

MSCI uses 200 analysts and AI systems to assign businesses a rating on a scale from C to AAA.

Sustainalytics measures a company’s ESG risks, how management is dealing with them, and how effective their decisions are. It assigns a rating on a scale from 0 to 100 and creates a report noting any potential risks that haven’t been dealt with. It’s measured at least 11,000 companies using 40 different indicators so far.

The Morningstar Sustainability Rating uses the type of industry to determine the final score (i.e. industries with high environmental impact score worse). It’s been featured in over 50,000 funds since being introduced in 2016.

It’s important to understand the meaning of ESG ratings because every action your business takes affects them.

ESG Factors

Several factors measure how well a business is doing in maintaining its ESG policies. Understanding them all is a critical part of creating a proper ESG policy.

The factors can be split up into three categories; environmental, social, and governance. Knowing them all helps you create an ESG policy that will net you a high rating and improve your impact on humanity and the environment.

Environmental

Environmental factors relate to a business’s impact on the environment. Examples include:

• renewable energy usage
• waste management
• environmentally responsible policies (i.e. avoiding deforestation and building on protected areas)

Social

Social factors relate to how a business treats the people it interacts with. This could be stakeholders, employees, or customers. Examples include:

• diversity and inclusion
• appropriate work conditions and labor standards
• community relationships

Governance

Governance factors relate to corporate policies and the way a company is run. They include:

• tax strategies
• company structure
• stakeholder relationships
• employee and CEO payments

Every factor matters, not only in determining a company’s overall ESG rating but in how they’re perceived by the public. Ignoring one aspect in favor of another can hurt your bottom line and reputation.

It’s also important that companies make clear communication a part of their ESG policies. They should let everyone know about anything they do that could affect environmental, social, or governance factors.

Comparing ESG to Other Policies

An increased concern for the environment has lead to a range of different methods for businesses to follow to regulate their impact. Part of understanding the meaning of ESG is learning how it differs from these other policies.

SRI stands for socially responsible investing and is similar to but not identical to ESG. SRI investors won’t invest in companies that don’t meet their ethical standards. While ESG ratings may impact an investor’s decisions, they may not be enough to eliminate an entire company from consideration.

Some ESG investments adjust based on a business’s ratings leading to lower expense ratios of 0.25%. Ethical investing requires a lot of research and can have much higher expense ratios of more than 1.5%.

CSR and ESG policies both focus on how sustainable a business’s practices are. The difference is that CSR focuses more on stakeholder relationships while ESG is about investors and capital markets.

ESG and impact investing aren’t the same, either. Investors choose companies with high ESG ratings to get higher returns. Impact investments are more about enacting changes that lead to better sustainability.

A business can choose whichever environmental policy they like, but an ESG policy is usually the best. It’s a more long-term solution, encourages more investors, and considers more aspects of the overall functioning of a business.

Why You Need an ESG Policy

You may not think that your business needs to consider ESG factors, especially if you’re not part of an industry with a high environmental impact like logging or fuel. There are several benefits to creating an effective ESG policy for every industry.

Several emerging trends make enacting an ESG policy more important than ever. They include increased climate change and mortality rates.

Developing an ESG policy is a long-term strategy for managing your business. It shows that you care more about the impact you have on the planet and the people who live on it than making a profit.

An ESG policy also increases your reputation and relationships. It attracts environmentally conscious employees and sends a message that you care to all potential stakeholders and customers.

The governance part of the ESG acronym is also an important thing to keep in mind, as it relates to the way your company is run overall. When handled properly, it can ensure your entire operation is efficient, socially responsible, and environmentally compliant.

A proper ESG policy can also impact your bottom line. Studies have found that companies with higher sustainability ratings had better stock returns.

Where to Learn More About ESG Policies

An ESG policy is a long-term, detailed way to ensure a business uses sustainable, responsible practices. It differs from other policies that measure similar factors.

ESG considers environmental, social, and governance factors. There are several rating companies, such as MSCI, Sustainalytics, and Morningstar, that let investors know how well a company is doing.

Maintaining a high ESG isn’t just good for the environment. It’s a long-term way to manage your business that shows everyone you care about how your business operations affect the rest of the world. This leads to a better reputation and a healthier bottom line.

The rest of our content has a wealth of information to answer any other questions you still may have about ESG policies. Learn more about us and contact us today for more information.

This is no surprise, as both growing health and environmental concerns continue to plague all countries.  

Customers are becoming more involved with the green movement and expect businesses to have the same interests. Here we introduce a collection of ways that your business can be environmentally-friendly fulfilling those expectations.

Consumers and Environmentally-Friendly Business

An important metric to look into for your business is the ESG Rating, or the Environmental, Social, and Governance measure. This is will give a clear picture of operations to both internal interest and external investment interest.

Looking at the results of this rating will give a good idea of where to start to make the best modifications to becoming a more environmentally-friendly business.

Procurement Methods

An easy place to start is at the beginning of the production line. This means understanding where you source your materials from and seeing how they produce and supply their products.

These details would include:

• Reduced amount of packaging material
• Created via sustainable means
• Not single-use items (when applicable)
• Either produced using recycled material or made of recycled material

Solar Energy Investment

Solar energy production will lower the dependence on fossil fuel and hydroelectric production. Especially helpful in areas that are heavily concerned with water levels in particular times of the year or particular weather conditions.

Implementation of solar panels in the west and southwest of the United States, for example, could have a large impact on the surrounding community during drought seasons. Keeping water from being utilized for power. 

Once established this is among one the easiest sustainability ideas for a business going green.

As an added benefit many organizations are incentivizing the reduction of natural resources used by businesses and the installation of technology used for this practice. One of the largest being solar panels.

Remote Workers

With allowing remote work, there is a collection of benefits that the business will be creating for the environment:

• Lower gasoline reliance
• Fewer Greenhouse Gas emissions
• Air pollution
• Less paper and plastic waste
• Lower energy consumption

To put the benefits in perspective, the U.S Environmental Protection Agency has estimated that the average worker travels approximately 7,839 miles per year and emits 7055 pounds of Carbon Dioxide each year.

This is an average but considers taking just a handful of drivers and making them remote workers and the change is already seen.

That is just air pollution alone; energy usage is lowered by fewer workers in the office, paper, and office products are lower, gasoline purchases and fossil fuels are lower because of lower usage in the businesses

ScienceDirect shows remote workers are more motivated to conserve and make an environmental impact.

Re-Use and Donate

In all possible cases keep items away from the landfills. The majority of the times an item is being “thrown-away” it is in perfectly good condition for second-hand use or recycling. 

There is an added benefit aside from the recycle and reuse of the items, most donations to non-profits and similar organizations are eligible for charitable tax write-off donations. 

Keep an Eye on Electronics And Technology

A growing trend has been with cloud-based technology. This remote storage will serve business two-fold. By eliminating expensive high powered server systems the power usage in the office space will be reduced highly.

The electric consumption of these servers is incredibly high when compared to other computer systems. 

Cloud-based systems will allow for remote collaboration and the reduction of print copy when sharing amongst the various departments. This serves as a reduction to the paper products.

Observe small details, as simple as lightbulb usage in the office setting. Change out standard incandescent bulbs to LED. LED bulbs are shown to last up to 20 times as long and use up considerably less energy.

Water Concerns

On the topic of resource usage, lesser thought of items in many offices is water consumption. The smallest of details can add up over time quite quickly. Water concerns continue to grow in the United States.

It is shown that in the past decade annual losses related to water-related financial losses amount to nine billion dollars annually. This is a concern that needs to be taken very seriously.

Environmentally-friendly businesses can help fix these problems with efforts such as:

• Working with specialized irrigation and rain sensors
• High-efficiency water systems, especially for cleaning jobs
• Using low-flow toilets and aerator equipment
• Addressing leaking equipment (it adds up quickly)

E-Waste

It is estimated that E-Waste is one of the fasted growing waste sectors in the world at this point with approximately 48.5 tons per year being produced per year. Cutting as much out of that as possible should be part of your sustainability ideas.

Schools and non-profits are amongst the first looking for second-hand computer systems. If the office is replacing printers, systems, monitors, check the schools in the area before the dump.

Most major retailers also offer credit-based trade-in and recycle programs when upgrading the equipment in your office. 

An important practice to be assured of is that your IT department does remove all secure information before processing the devices.

A Clean Business Is a Strong Business

With benefits on all sides, it is clear as to why working as environmentally-friendly as possible is worth the investment for any business, big or small, in this day and age. As the world community grows, our impact on each other and the planet does, too.

If you are having concerns with your ESG evaluations and are looking to improve them, look come read our guide on the key details that affect and aid those ratings.

You invest intending to make a profit from your investment. This can be difficult if the company you’ve poured your resources into performs dismally on the market. 

The ESG approach, for instance, is an approach many investors use to invest in the right companies. In this piece, we’ll look at the latest ESG trends investors have adopted and why these ESG trends are so important.

What Is ESG in Investments? 

ESG abbreviates environmental, social, and governance. While there’s nothing quite leading about the name, it’s quite an important factor for both investors and company executives.

Environmental, social, and governance are a set of bases (plural basis) through which investors gauge a company for investment potential. In doing so, companies can determine the corporate inclinations and future financial performance of the company in question.

However, ESG doesn’t only focus on the financial prosperity of a company. It also has its environmental and social aspects. For instance, an ESG investor may invest in a company because of its remarkably low carbon footprint or its spirited effort to rehabilitate deforested areas.

Thus ESG investing is a subset of investment that seeks not only financial benefits but also positive social and environmental impact. Some experts may use ESG interchangeably with sustainable investing which further breaks down into:

• SRI- Sustainable and Responsible Investing
• Ethical Investing
• Impact investment

These are just a few examples of an entire umbrella of investment approaches that smart investors use nowadays. Over here, you can check out how SRI investing and ESG investing compares.

Five Reasons Why Investors Should Keep ESG in Their Investments

ESG investment has gone a long way from its initial Who Cares Wins report. This report promoted socially and environmentally conscious companies, which was the premise of ESGs.

In the business arena, there are currently ten significant trends that are etched in ESG investing. For instance, in 2016, businesses managed $30.7 trillion worth of assets under these ESGs.

If ESG investing has been on your to-do list, here are a couple of ESG trends that corroborate with your decision:-

1. Climate Change Threatens Our Very Existence

Decades ago, climate change was just something we’d hear that it was on the brink of happening. Decades later, and we are confronted with the harsh realities of climate change. 

It is evident in the increasing forest fires, the melting of our snow caps, and the unpredictable weather conditions. It’s no secret that huge multinationals are the main culprits engendering this climate change.

Fortunately, scientific innovation has led to mitigation techniques to curb these companies’ environmentally polluting effects. That way, companies can still maximize profits without necessarily being detrimental to the environment.

ESG investment focuses on companies that have adopted environmentally conscious manufacturing operations. In choosing ESG investing, you’ll not only be making a financially prudent decision, but you’ll also be doing the environment and the earth a huge favor.

2. The Increased Mortality Rate

In case you didn’t know it, human beings are living longer than ever. Life expectancy is set to be longer than ever, thanks to improved living standards.

There’s both a good bit and a not so good bit to this improved life expectancy. The good bit is that this is proof of improved living conditions worldwide. The bad part is that sustainability issues will affect the majority of the human population.

With that in mind, ESG investing seems a reasonable measure to decrease the impact of the sustainability issue on the general population. The more people there are, the more people have to suffer the consequences.

In fact, the issues of unsustainability will affect not only our children but also our older generation before their time has come.

3. The Social Media Wave

Nowadays, everyone is on social media, and businesses could leverage social media to their advantage as a pretty effective marketing tool. 

Besides its marketing potential, social media can transform entire cultural norms. It can also alter complete consumer preferences or even market trends.

Keep in mind the social media wave is currently premised on sustainability and ethical justice. What some thought would be a passing wave seems to be here to stay.

If you do your homework, you’ll find the most ‘green’ companies or socially-conscious companies attract the largest social media following. This social media following translates to higher sales and profit margins for these companies. Thus, your investment pays off.

4. Good Governance Is Increasingly Important

Governments worldwide have had a lot to learn from the financial crisis of 2008. This event demonstrated the importance of heeding issues of culture and conduct, even in top-tier governance.

The world still feels the impacts of the 2008 financial crisis to this very day. The event stresses the importance of good governance, even in our investments and public to private partnerships. 

Failure to do so could have disastrous effects in our financial situation not just as investors but as an entire country. 

5. The Public-Private Partnership Growth

Public-private partnerships have been on the rise, with the federal government being heavily involved. The government could tackle social concerns and foster infrastructural development through these partnerships.

The private market has bolstered social investments for the mutual benefit of each party. Through EGS investments, investors can play their part in nation-building while making a killing while they’re at it.

ESG Trends for a Brighter Tomorrow

There are plenty of reasons why ESGs are the way to go when it comes to investments. On one-hand, you invest in a worthy cause and also have profit-generating assets that are backed by the government.

These ESG trends will really come in handy when you’re making huge investments that could benefit generations to come. Try the ESGs approach today; you won’t regret it.

For more information on ESGs, be sure to check out our other pieces and expand your ESG knowledge store and do some proper investing.

Consequently, you should look to improve ESG measures in your company. You can start by looking at these three areas:

Create a sustainability strategy

To tackle the E (environmental) part of ESG, you can start by creating a sustainability strategy. Be aware that your business will probably have a significant carbon footprint. Most companies do, which is why you need a strategy in place to combat this.

Do a full audit of your business and work out where the majority of your carbon footprint comes from. You may find that specific operational procedures are causing the biggest impact. In this case, you can work on developing solutions to make these greener. Implement policies throughout your business to reduce your carbon footprint by encouraging employees to follow certain rules. A simple example of this is a strict recycling policy. Ensure you recycle as much as possible and avoid generating lots of waste to go to landfills.

With a sustainability strategy, you have a clear path to tackle your environmental impact and keep things as green as can be.

Address Your Supply Chains

Your supply chains are a pivotal area of ESG improvement. You need to pay close attention to who you’re dealing with. Our advice is to conduct an investigation into your suppliers – with an emphasis on human rights. This helps to deal with the social aspect of ESG and can improve your ESG performance.

In essence, you want to ensure that your business doesn’t get into bed with companies that exploit human rights. Check their processes to be certain that everything is above board, and that your suppliers are paying their workers properly. If this isn’t the case, then you either demand things change or take your business elsewhere.

Create a Statement of Purpose for investors

To improve the governance side of ESG, you should start changing your approach to investors and shareholders. We spoke about this in a previous post about managing ESG, and the main concept is that you create a Statement of Purpose to show investors.

This statement shows how your business intends to impact the wider society. What goals do you set in terms of how you want to shape the world around you? Most shareholders care more about this than the money you make. It’s all about realizing how you want to impact the world and what steps you’ll take to bring positivity to society. Investors will then see if you align with their own beliefs, which can help you secure more funding to achieve all of your goals.

It’s important to always measure your ESG performance to see how things are going. We advise you to look at things right now, then improve on the three areas displayed in this article. Then, measure your performance again, and you’ll be amazed at how much better it is.

Global responsible investments have increased by more than 34 percent over the past two years to more than $30 trillion.

More investors are thinking in terms of ESG investing than ever before.

However, have you ever wondered anything about the drivers behind ESG investing? From global warming to demographic changes, there are so many factors behind this investing trend.

Check out the reasons why the principles of responsible investment are becoming mainstream below. Let’s get started!

1. Good Governance is Always Important 

Investors aren’t necessarily concerned by ESG investing for its own sake. They want to ensure they get a return on any investments.

Imagine if the political system in a country breaks down? What if there are any significant constitutional changes? This could undermine their investments. 

Following the financial crisis of 2007-08, investors are more aware of the importance of effective corporate governance.

2. Further Government Regulations

Governments and investors are both considering the impact of ESG risks. Investors are concerned by the pressure on governments by the public to change course on a wide range of issues.

This includes German Chancellor Angela Merkel’s decision in 2011 to shut down nuclear power plants across Germany following the Fukushima disaster.

ESG considerations allow investors to better predict when this kind of move could affect their investments. 

3. There Is a Climate Emergency

Scientists at the UN have declared that there is “no doubt left” regarding the fact that human behavior is causing climate change.

There are numerous ways to mitigate the worse consequences of climate change. This includes the international treaties, such as the Paris Climate Agreement.

According to climate experts, we need to keep rising global temperatures below two degrees to prevent catastrophic climate breakdown.

As governments implement environmental regulations and adapt to climate change, private investors are waking up to the importance of sustainable investments to withstand financial risks.

4. Transition to Renewable Energy   

Energy markets are changing rapidly. As fossil fuel energy sources are quickly being replaced by renewable energy and clean technology.

The changing dynamics of the energy market are causing investors to shift their portfolios to reflect this trend. By the year 2040, it is expected that renewable energy will comprise the primary energy resource.

As oil and coal are declining, natural gas, solar and wind energies have emerged as cheaper and more reliable sources of energy.

5. Rapid Technological Developments

Whether it’s AI, driverless vehicles, smart meters or virtual reality, there are a number of technologies that are changing consumer behavior.

As business operations and consumer habits shift, organizations are rushing to adapt to the changing landscape.

Corporations with resources and knowledge will be able to adapt and take advantage of emerging opportunities. Others are putting their investors at risk of losses.

6. Growth of Public and Private Partnerships

In politics, there has always been a great debate about what the public sector should take care of and where the private sector should step in.

But, Public and Private Partnerships (PPPs) have turned this on its head. Yet, up until now, PPPs have always been a small part of the world’s global spending.

However, there is a growing realization that PPPs have the potential to address social and economic challenges.

Private investments have the capacity to be a catalyst for positive transformations. They could help to deal with numerous environmental problems as well.

7. The Cultural Consequences of Social media 

Nearly everyone uses social media today. From 2005, when only 5% of the U.S. population were social media users, today’s population has around 80% social media users.

The global growth of social media could have numerous cultural and social consequences of investors.

As people can interact online across borders and exchange norms, this may have knock-on effects for consumers and voters across countries.

From increasing regulations around the environment to unsettling stable democracies, there are many risks for investors here.

8. Changing Demographics Across the World

There are estimated to be more than 10 billion people on Earth by the year 2050. But, the big news is that almost one-quarter of people will be over the age of 65.

As life expectancy continues to grow in developed countries, the Earth’s natural resources have to deliver for an even bigger population.

Climate change won’t only affect our children and grandchildren. But, rather ourselves in a less capable and older state.

9. Continued Globalization of the Economy 

Global corporations are increasingly embedded in the world economy. The supply chains and consumers are usually spread across continents and countries.

That’s why when companies can quickly be damaged by investors are pull out when news of everything from mass deforestation or child labor is reported.

10. Millennials are Taking Over Baby Boomers 

There is also a generational shift happening. There are now over 75 million millennials in the U.S. and many more around the world.

As Baby Boomers are replaced by the younger generations, there is a growing shift of social and political priorities. 

This includes the growth of sustainable finance and issues, such as social inequality, rising to the top of the political agenda.

Discover More About ESG Investing 

We’re hearing a lot about ESG investing today. However, it’s not always clear what is driving the growth in the principles of responsible investment. 

There are numerous trends and drivers that are changing the way investors see what they do. This includes global problems, such as climate change and social inequality.

But, there are also opportunities for investing in growth sectors, such as renewable energy and emerging technologies.

If you want to discover more about ESG investing, check out everything you need to know on our website or get in touch. 

Supply Chains

One key trend is the shift in focus away from businesses themselves and onto their partners. Primarily, the main issue is supply chains. Your company will have various suppliers that provide you with the resources you need to conduct business. While your establishment may have a strong ethical standing and a transparent brand, your supplier might not.

This year, businesses need to pay more attention to the ethical conduct of their supply chains. Are you dealing with other companies that use ethical processes, or are they exploiting local workers in third-world countries? We’ve spoken about adjusting your supply chain in terms of managing ESG before. You need to make a change and ensure that your suppliers align themselves with your needs and values. Otherwise, there’s the danger of making a negative social and environmental impact through your supply chain.

Climate Change Policies

Climate change was a prominent ESG issue in 2019, and it doesn’t look like slowing down in 2020. The catastrophic fires across Australia have really thrown climate change into the public eye more than ever before. People are calling for changes to governing policies in a bid to prevent issues like this from happening again.

Governments are starting to listen, and this will lead to new policy implementations. As you can imagine, businesses will be hit hard by new regulations to try and curb their impact on the environment. Companies should also try and create their own policies to lower their carbon footprint and show and active interest in fighting climate change.

Innovative Technology

ESG innovation grew in the last twelve or so months. 2020 will see this trend continue as more and more innovative technologies are being produced. We’ve seen an increased demand for electric vehicles and low-carbon machines. Companies are looking to develop technology that improves the general infrastructure to allow things like electric vehicles to become more realistic and easier to own. There’s also a clear movement to commit to a low-carbon economy.

Alongside this, technology continues to advance in other areas as well. The increased scrutiny on the meat industry has led to innovations that produce meat-free products with a much lower carbon footprint. Then, there’s the idea of innovative technology to help streamline businesses and provide more automation. Expect to be faced with more and more ESG-driven innovation in the coming months.

These are the top three issues in ESG to look out for in 2020. It’s crucial that you pay attention to these things as you need to improve on all of these issues. Make a commitment to adjusting your supply chains and vetting your suppliers so they align with your company. Be active in the right against climate change – introduce your own policies and use your power to influence the government. Finally, be open to new innovations and technologies to help streamline your business and reduce its negative impact on the world.

Google, Ben & Jerry’s, Lego, Levi Strauss, Warby Parker, Tom’s, and others have built their brands with strategies and goals developed around environmental and social issues. These companies are now seeing the benefit of those strategies. As an investor, you also need to pay attention so that you can maximize your investments.

You need to know about environmental, social, and corporate (ESG) metrics so that you can analyze companies’ visions and strategies and improve your investment returns. As marketing guru Mark W. Schaeffer, author of The Marketing Rebellion: The Most Human Company Wins, has noted, the consumer is now driving marketing and sales and the consumer now wants companies they believe in. Understanding which companies adhere to that new paradigm and use ESG principles will ensure your investments the best possible chance of success.

Using ESG metrics and criteria to evaluate assets is an increasingly common practice. But as an investor, what is it that really matters? Read on to find out.

Know Your Environmental, Social, and Corporate Governance

ESG first came to our attention in a 2005 study entitled “Who Cares Wins.” Since then, experts have refined the concept of ESG. Today, responsible investors have a consistent set of criteria to consider. The environmental, social, and corporate governance concerns of investors focus on non-traditional financial analysis.

We no analyze environmental factors such as climate change and electricity usage policies. Social factors revolve around treatment of employees and staff diversity. Corporate governance reflects how companies act in relation to the environment and social change and how they self-regulate and report upon those activities.

Governance is something to pay close attention to. If the company’s management structure isn’t truly invested in taking responsibility in those areas or isn’t paying full attention to those concerns then the E and the S of ESG are simply lip service.

We want you to know all about ESG. We want you to apply that knowledge to your investment strategies has incredible value. We also believe that you need to know whether the companies you invest in are doing the same.

What ESG Metrics Should You Evaluate to Make Your Decision?

Doing research is all well and good, but you also need to make sure you’re paying attention to the right things in that research. What you should evaluate about a company and which metrics you should use are crucial to your success.

A 2019 IHS Markit report outlined ten metrics to really pay attention to when investing. That list includes:

• knowing whether or not a company has an ESG policy as part of its formal documentation
• how broadly ESG policy is dispersed throughout that company
• how intrinsic is ESG to the company’s code of ethics
• how diverse the company’s staff is and how that diversity affects corporate culture
• has the company internally investigated its carbon footprint
• how employees are viewed and treated by the company

The environmental and social metrics can be tough to find and check because they aren’t uniform and reporting varies from country to country. Corporate governance information is more readily available because regulations regarding the reporting of those standards are more rigorous and complete.

When looking for metrics to evaluate remember to be confident in their trustworthiness. You also need to spend time establishing which metrics are most important to your investment strategy. There are many metrics to consider across the ESG spectrum. Not all will suit your strategy or resonate with you, but make sure you adhere to them. When determining your investments tap into those metrics. Take advantage of the increasing success of ESG companies in your portfolio.

What’s the risk?

ESG is a relatively new set of data to incorporate in your investment strategy. Many corporate executives and investors still don’t have enough information about ESG to make sound strategic decisions on where to place their money.

As a smart investor you need to know what the risks are when you decide to use an ESG strategy in your financial ventures. Our goal at ESG Central is to give you the facts so that you can make profitable and viable decisions.

Lack of relevant and useful information is a major risk. None of us like to make the call when we don’t have enough facts. Information on ESG is getting better as more companies make the move to environmentally and socially responsible business models, but it’s important to do your homework.

Trusting the sources you do find is also crucial. Government departments, NGOs, and private organizations now produce helpful reports. As sources go, these are often an excellent starting point. You can minimize your risk by paying attention to data sources such as Principles for Responsible Investment, which is endorsed by the United Nations. The Institutional Investors Group on Climate Change and the Organization for Economic Co-operation and Development (OECD) are also good places to look. OECD, for example, has guidelines on many ESG-relevant considerations.

The key thing to remember here is that, just as with any other investment decision, when you’re considering using ESG metrics you need to do your research.

Make ESG Central To Your Investment Strategy

We want you to succeed when you invest. Consumers are taking notice of ESG and so should you. The companies that put value in environmental, social, and corporate governance metrics are going to be those that win. 

You do need to do your research. The available information isn’t as good as we would all want it to be just yet, but it’s improving. Staying on top of trends in ESG and ESG metrics will serve you well as the corporate landscape continues to shift towards more responsible practices.

We can help keep you informed. Sign up to receive our regular articles on everything ESG and you’ll be making the best investment decisions you can.

In recent years, we’ve seen the emergence of a range of acronyms, including ESG, SRI, and impact investing. But what do they mean, and what are the differences between them?

What Is ESG Investing?

ESG stands for “environmental, social, and governance.” Thus ESG investing focuses on building portfolios based around companies that do well relative to these criteria. An ESG investor, for instance, takes into consideration factors such as a firm’s energy consumption, pollution, human rights performance, health and safety, governance conflicts of interest, and quality of management.

The financial community mainly uses ESG measures as an indication of overall company performance instead of social consciousness. Firms that do better on standards of ESG also tend to yield higher returns.

Differences Between ESG And Other Types Of Investing

ESG vs. Impact Investing

ESG differs from “impact investing” in a significant way. Typically, ESG investors put money into ESG-weighted funds because they believe that they will ultimately yield higher returns in the future based on historical performance. The primary motivation, therefore, is choosing progressive companies that have positioned themselves according to ESG criteria, which are themselves indicators of future financial success.

Impact investing is different. Here, investors actively look for opportunities to create positive outcomes in society, not just make money for themselves. Thus, returns are secondary. For instance, an impact investor might plow money into a company building electric cars, not because he or she believes that the firm will be highly profitable, but that they want to use their wealth to accelerate the transition to sustainable transport.

ESG vs. SRI Investing

SRI stands for socially responsible investing. It is different from ESG approaches in the sense that it actively excludes individual companies from portfolios if they fail to meet the investor’s ethical standards.

An SRI investor, for instance, might refuse to include a company in his or her portfolio if it maintains a significant gender pay gap for like-for-like work. SRI-focused investors will also avoid putting any money into companies that cause excessive environmental damage, violate human or labor rights, sell harmful products like alcohol or tobacco, or promote gambling. People may have objections to investing in companies for a variety of personal, political, or religious reasons.

ESG vs. Ethical Investing

There’s another difference between ethical investing and ESG investing: many ESG products are based on low-cost ETFs that automatically adjust according to the scores churned out by rating agencies like MSCI or Sustainalytics. Expense ratios for these products are exceptionally low: around 0.25 percent per year. Thus, in most cases, the cost-adjusted returns are likely to be relatively high.

The same is not, however, often true of ethical investing. Socially responsible investing requires a lot of detailed research and qualitative analysis performed by dozens of analysts. Expense ratios for these funds, therefore, can sometimes be as high as those you see in mutual funds or hedge funds – upwards of 1.5 percent.

Investors and progressive businesses, however, have a problem: how to measure ESG performance. It’s a slippery, qualitative concept that needs to be measured more rigorously. Unfortunately, many “ethical” investors and socially-orientated business leaders currently go with their intuition instead of using robust performance metrics to prove their ESG credentials.

What Is An ESG Rating?

A group of agencies, however, has noted this hole in the market and set about trying to do something about it. ESG performance ratings tell company bosses how well their companies are doing in this regard.

Who measures ESG? Let’s take a look at some of them now.

MSCI Ratings

MSCI is a significant player in the investing world, offering money managers and retail customers the opportunity to purchase a wide range of equity- and bond-related assets, particularly ETFs.

Since the emergence of ESG considerations, MSCI has been looking for ways to make company performance more transparent in this regard. The agency uses a combination of 200 analysts and artificial intelligence to calculate the ESG performance of companies and then assign a rating. Currently, businesses rank on a scale from C to AAA.

It’s not a dumb ranking system either. MSCI uses a broad cross-section of data from both voluntary company disclosures and alternative data sources to generate a complete ESG picture.

Sustainalytics Ratings

Sustainalytics’ ratings work on a similar principle to MSCI’s, helping investors choose portfolios that match their ESG goals.

The agency, however, does things differently from some of the others. First, it starts by measuring the exposure of each company to ESG risks at the sub-industry level. It then looks at management dimensions to calculate how well the organization is mitigating its exposure, differentiating between manageable and unmanageable risks. It then evaluates the company’s policies in relation to its manageable risks, identifying where it has been effective and where it could lead to higher risks. The final rating between 0 and 100 then compares the total unmanageable risk to the degree to which the enterprise accommodates its manageable risks.

Sustainalytics makes it easy for investments to determine whether they should invest in a particular company or not. Each report identifies the level of risk of the company (whether low, medium, high, or severe) and compares its risk to industry peers. It then goes on to break down the different risks that the company faces, depending on agreed-upon sub-industry standards. For instance, the report might report the threat from carbon dioxide, bioethics, or human capital.

It then reports the absolute magnitude of the risk of the company with the total score delivered at the top. Sustainalytics now covers more than 11,000 companies and uses more than 40 industry-specific indicators to keep investors informed.

The Morningstar Sustainability Rating

The purpose of the Morningstar Sustainability Rating is similar to those of the agencies above: to provide investors and shareholders with quantitative information about the environmental, social and governance performance of various companies, compared to their peers.

The Morningstar Sustainability Rating system has been running since 2016 and now features in more than 50,000 funds. What’s interesting about the agency’s approach is that it uses the same scale across all economic sectors, allowing investors to make direct comparisons of one company to another, even if they occupy different areas of the economy.

For instance, oil and gas companies automatically have their ESG scores bumped up because of their carbon dioxide emissions. The agency, for example, gives Royal Dutch Shell a risk score of 33.7 because of its impact on the environment, compared to Microsoft’s relatively low 14.1, despite similar governance. Unlike some of the relative scores of other ESG metrics, the Morningstar approach accepts the inherent difference between industries. In short, it doesn’t matter how exceptional the “S” and “G” components are at an oil and gas company, it can never overcome the core effect of its operations on the planet.

Summary

All of the ESG rating schemes discussed here attempt to quantify something that had once been qualitative. With them, investors can objectively measure the sustainability of their portfolios relative to ESG criteria, instead of having to guess.

Business leaders need to be aware, though, that the rating systems differ markedly. Some offer absolute measurements of company risk, while others are relative.