Environmental, Social, and Governance (ESG) Criteria

Environmental, social, and governance (ESG) criteria are a set of standards for a corporation’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria study how it manages relationships with employees, suppliers, clients, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

How Environmental, Social, and Governance (ESG) Criteria Work

Investors (notably younger generations) have, lately, shown interest in placing their cash where their values are. As a result, brokerage firms and mutual fund companies have started offering change-traded funds (ETFs) and other financial products that follow ESG criteria.

Types of Environmental, Social, and Governance (ESG) Criteria

There are three key parts to ESG investing—the environmental, social, and governance aspects.

Environmental

Environmental criteria might embody an organization’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can even help consider any environmental risks a company might face and how the corporate is managing these risks.

For example, there could be issues related to its ownership of contaminated land, its disposal of hazardous waste, its management of toxic emissions, or its compliance with authorities environmental regulations.

Social

Social criteria look at the firm’s enterprise relationships. Does it work with suppliers that hold the identical values as it claims to hold? Does the company donate a proportion of its profits to the local community or encourage workers to perform volunteer work there? Do the company’s working conditions show high regard for its staff’ health and safety? Are different stakeholders’ pursuits taken into account?

Governance

About governance, traders could wish to know that a company makes use of accurate and clear accounting methods and that stockholders are allowed to vote on important issues.

They could additionally want assurances that companies keep away from conflicts of interest in their choice of board members, do not use political contributions to obtain unduly favorable therapy and, in fact, don’t engage in illegal practices.

No single company might pass every test in every class, of course, so investors need to decide what’s most necessary to them and do the research.

Particular Considerations

On a practical level, funding firms that follow ESG criteria must additionally set priorities. For example, Boston-based Trillium Asset Management, with $4.8 billion under administration as of September 2021, makes use of a collection of ESG factors to help identify companies positioned for sturdy long-time period performance.3

Determined in part by analysts who establish issues dealing with different sectors and industries, Trillium’s ESG criteria include avoiding:

Companies that operate in higher-risk areas or have publicity to coal or hard rock mining, nuclear or coal energy, private prisons, agricultural biotechnology, tobacco, tar sands, or weapons and firearms.

Or corporations which have main or recent controversies with human rights, animal welfare, environmental considerations, governance issues, or product safety.

Things that Trillium seeks out or considers positive ESG criteria, include:

Setting

Companies that put out carbon or sustainability reports

Limits harmful pollutants and chemicals

Seeks to decrease greenhouse gas emissions

Makes use of renewable energy sources

Social

Firms that operate an ethical supply chain

Supports LGBTQ rights and encourages diversity

Has insurance policies to protect towards sexual misconduct

Pays truthful wages

Governance

Corporations that embrace diversity on their board

Embraces corporate transparency

Employs a CEO independent of the board chair

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