Environmental, Social, and Governance (ESG) Criteria

Reviewed by Sweta | Updated on Aug 27, 2020

Introduction

Environmental, Social, and Governance (ESG) is a criterion used by investors for screening companies. Investors increasingly prefer a company which is environment-oriented and has high corporate governance standards. The ESG criteria are a set of standards for a company's operations that socially conscious investors use to screen potential investments.

Understanding ESG Criteria

A corporates social and community orientation involves how it manages employer-employee relations, customers, suppliers, and other communities. Stakeholders seek complete disclosure of financial details and other material transactions.

Environmental criteria consider if a company operates with concern towards nature. The social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company's audits, executive pay, leadership, internal controls, and shareholder rights.

Factors to Consider

  1. Investors seek value-based investments. They seek companies whose vision and products are oriented towards conservation of the environment.

  2. Environmental criteria may include a company's energy use, waste management, pollution treatment, natural resource conservation, and treatment of animals.

  3. Social criteria look at the company's business relationships. Does the suppliers' values align well with that of the company's? Does the company donate a percentage of its profits to the local community or does the company encourage employees to perform volunteer work for the community?

  4. With regard to governance, investors may want to know that a company uses accurate and transparent accounting methods and that stockholders are given an opportunity to vote on important issues.

  5. Companies must comply with the pollution standards and conservation rules and regulations of the government.

  6. Corporate contribution to socially responsible initiatives and community development indicates its community-orientation.

  7. The involvement of shareholders in decisions taken in annual general meetings and other company meetings.

  8. Non-compliance with environmental regulations can result in financial costs for a company.

  9. Non-compliance with governance standards and statutory obligations can result in the imposition of fines on corporates.

  10. ESG investing is sometimes referred to as sustainable investing, responsible investing, impact investing, or socially responsible investing.