The Major Metrics: An Investor’s Guide to ESG Metrics That Matter
Socially conscious businesses are on the rise. Eighty-seven percent of consumers want to buy products from companies that believe in the same issues they do.
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.
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