When asked about ESG Investing definition, most people will certainly respond correctly to the meaning and spirit of this concept.
However, the way the ESG Investing Definition is implemented and carried out by publicly traded companies may not fully meet its desired objectives.
Before you choose your ESG investment, it may be worth while taking a closer scrutiny at what goes on behind the fancy reports.
Table of Contents
ESG Investing Definition: Overview
What is ESG Investing ?
ESG Investing definition tells us that its is an investment approach that focusses on companies that rank very well is the following areas: Environment, Social and Corporate Governance.
You will often read that ESG investing is Socially responsible investing.
Which means that an ESG investor is someone who will seek to invest primarily in socially responsible companies.
The genesis of ESG investing can be traced back to 2004.
It was the then United Nations Secretary General Koffi Annan who invited 50 big Financial institutions to a Joint Venture initiative.
Why Is ESG Investing Important ?
Since then, all public traded companies now have adopted some form of reporting on this concept.
Typically, you will find a section called “Sustainability” on companies websites.
Some companies may use the word “Sustainability and Corporate Responsibility (CR)” but rarely will you find the full ESG definition.
The importance of ESG for investors is based on the main notion that a company that ranks well is more likely to continue producing good performance results over time.
Thus making such company attractive to investors as it is bound to continue increasing value for its shareholders.
What Is the Difference Between ESG and Sustainability ?
Over the last past 5 years, Google trends shows that the interest for the term “ESG investing” has surpassed the term “Corporate Sustainability”.
As recently as in 2020, the former has spiked up significantly.
This could well be due to the recent corporate scandals and the #Metoo movement.
When studying the Sustainability reports of companies, one major objective is present.
That is to minimize the Risk for the companies and their shareholders.
We know that Corporate Sustainability creates value for the shareholders.
The way the term sustainability is conveyed in this report means purely to do better in their goals.
Whereas, ESG is meant to be be very specific in three domains: Environment, Social and Corporate Governance.
Therefore, we can see that Corporate Sustainability reports will pick and choose a subset of the ESG definition.
What is the big deal ?
Well if we are basing our ESG investing on Corporate Sustainability reports alone then there is a big Risk of fall short of the ESG investing Definition.
How Does ESG Investing Work ?
The premise of ESG investing is that to choose investments based on its three core values which out to be as important as shareholder value.
Next time you are reading a Corporate Sustainability report, look for word Stakeholders vs. shareholders in the the general description.
Stakeholder implies that other parties interests are considered.
Not just the shareholders best interests are sought as it has always been the case.
Some companies are more transparent that others on the ESG values.
Finding out which ones is not always an easy task and requires research.
On the value of Environmental value, one popular initiative is the Percentage of Carbon Emissions or Carbon Footprint.
I know it is not easy at all of course for companies to just decree it is going to go to 0% by a given date.
However, some are doing so even with so far away dates in the the future 🙂
The longevity of companies can be at Risk if such companies are not paying attention to the impact of their business to some stakeholders.
Imagine a mining in a a remote location in a third world country as it is usually the case.
That company rely on the local manpower to generate revenue.
The work environment can sometimes be very difficult.
We have read of stories which villages have been devastated by the long term health effects in these situations.
Without proper Corporate social responsibility, such stories can only go up increasingly.
It is a lose-lose outcome on both sides.
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ESG Investing Trends
So what can corporations do to maintain a healthy living system between all stakeholders ?
One answer can be as simple as become more transparent.
When you consider and ESG investment, a good way to to look for a complete ESG report not just sustainability.
On the Environmental front, items to seek on the report can be:
- CO2 Emissions
- Purchased Power by Source : Natural Gas, Hydro, Coal, Nuclear , Solar, Wind, Geothermal
- Water Utilization
- Hazardous Waste: Recycled vs Disposed vs stored on site
When its comes to Social Responsibility, the focus can be be on :
- Health and Safety Incidents | Number of Fatalities
- Workforce Distribution | Men vs Women | Attrition rate (Men vs Women) | Women in Leadership Positions
- Communities Investments | Education and Training | Economic Development and Infrastructure
- Grievances by Type | By Region | by Sub Categories | Employment | Human Rights| Health and Safety
As for the Governance value of ESG investing definition, we can bring forth basic principles of Business Conduct Training and anti-corruption practices.
What are ESG Investing Scores
ESG Scores are used by investment companies to show well corporations are doing to on the three values of ESG.
Typically, the more data a company provides the more likely its core would be thus generating more trust from the investment community.
Such scores usually range from 0 to 100.
Here is a good library to to locate companies that report ESG scores in different industries.
We will be bringing you more articles on institutions which provide ESG investment funds in the near future.
Examples of ESG Funds | Vanguard | Fidelity
Limitations of ESG Investing ?
After 20 years of existence, ESG Investing has not fully delivered on tis promise according to one high authority in this domain.
Here is a video and transcript of another video by John Fullerton, founder and president of Capital Institute, a non-partisan organization working to create a more just and sustainable way of living on earth through the implementation of a Regenerative Economy.
ESG in investing stands for environmental, social and governance. It is a set of criteria investors can use to understand the values and the future of an organization.
Companies pour resources into disclosing their ESG because, as the saying goes, sunlight is the best disinfectant. Or so has been the thought for many years.
While ESG is undoubtedly good, says John Fullerton, mere transparency is not going to solve the world's sustainability issues. For that, public companies need to act more like private companies and be responsible to their owners.
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