What Is ESG Investing?
As an investor, people have many different ways to align their values with their investments to make a positive difference in the world. People should invest in a socially responsible manner, and ESG is an acronym that stands for environmental, social, and governance. What does that mean? It means that as an investor, people who follow this practice will look at three different criteria during investing.
Environmental means that investors will look at the impact that the company has on the earth. They want to act as good stewards for the environment and have good practices for it. Some of the things that investors might look at with this practice include:
- Greenhouse gas emissions goals
- Recycling and safe disposal practices
- Green products and technologies
- Usage of renewable energy
- Positive relationship and track record with the EPA
This looks at the types of things that will have an impact on the social level. For example, it looks at company culture, the customers, the consumers, and the suppliers. As an ESG investor, people will look at specific reports for the social aspect like PRI and GRI reports. Some of the things to examine here include:
- Employee benefits, perks, and pay
- Employee turnover rate
- Mission of the business
- Public stance on social justice issues
This looks at the board of directors and the company oversight. Do they take a shareholder-friendly approach, or do they take a management-centric approach? How the business gets run is crucial, and shareholders should have a say in this. The things that impact governance include:
- Executive perks, compensation, and benefits
- Proxy access
- Compensation tied to metrics that will drive long-term company growth
- Chairman and CEO roles separated
- Total transparency and history of lawsuits with shareholders
They first popularized ESG investing in 1970. Milton Friedman made the term popular, and he argued how the only responsibility that companies have socially is to maximize profits to the shareholders. Several investing strategies have also popped up over the years on concepts like this. However, many new investors are interested in ESG investing, so perhaps Friedman wasn’t entirely correct. There truly is a market for ESG investments.