ESG (Environmental Social Governance) encompasses how companies manage their impact on people and the planet – everything from mitigating negative environmental outcomes to taking active steps against climate change.
Investors seek companies committed to lowering their carbon footprint, supporting sustainability efforts and engaging in ethical business practices.
Environment
ESG stands for environmental sustainability, and responsible investors seek out companies that demonstrate good stewardship of natural resources and the planet. Furthermore, investors should look out for companies working toward creating a net-zero and low carbon future – as reported by the IPCC (Intergovernmental Panel on Climate Change) this issue has become even more pressing to investors today.
Companies focusing on ESG factors often prioritize sustainability as a core part of their business model, realizing that customers demand sustainable products and seeing it as a competitive edge in providing them.
An organization with an effective sustainability strategy can generate shareholder value by complying with regulations like carbon pricing that aim to reduce greenhouse gas emissions. They may also save costs through reduced energy usage or waste reduction measures. Finally, advances in technology make data collection processes simpler so finance teams can produce comprehensive reports without compromising accuracy or transparency.
Human Rights
Many investors have taken up ESG as a means of better aligning their portfolios with long-term sustainable and socially responsible investing goals. A combination of fiduciary responsibility, evidence linking consideration of ESG factors to financial performance and surveys of ultimate beneficiaries that indicate strong support for this approach have all increased investor enthusiasm in this area.
Human rights form the core of ESG analysis and interlink with environmental and governance concerns. Investors have long taken measures to avoid companies with poor records on human rights; examples include divestment campaigns that resulted in pension funds forgoing investments in companies doing business in apartheid South Africa.
The PRI believes that asset owners must include human rights protection as part of their responsible investment practices, aligning ESG reporting and stewardship practices with global standards like UN Guiding Principles on Business and Human Rights or OECD Guidelines for Multinational Enterprises. To do so successfully requires adopting transparent and consistent approaches while taking account of double materiality issues while engaging meaningfully with stakeholders and rightsholders.
Governance
ESG practices can provide companies that implement them effectively with a competitive advantage. Investors and clients will recognize this, showing they care for the environment and society as they invest their capital with your firm. Furthermore, ESG practices reduce business risks, improve employee retention and compliance rates, and enable your organization to meet business goals with sustainable resources.
There are numerous frameworks designed to assist companies with developing and reporting on their ESG efforts, such as the Task Force on Climate-related Financial Disclosures and United Nations Sustainable Development Goals. Many investors utilize such frameworks and other similar ones as measures of an organization’s ESG performance.
Implementing ESG initiatives may not always be simple. Integrating it into daily operations and long-term strategies can be more difficult due to lack of standardization, transparency, or verification – particularly for companies engaging in greenwashing – which involves making false claims about environmental efforts.
Shareholder Value
Responsible and impact investing are terms commonly associated with investing with ESG considerations in mind. They involve considering ESG factors and sustainability outcomes during the investment process to better align investments with clients’ and beneficiaries’ objectives.
This can be accomplished by screening companies, selecting thematic products or building portfolios around particular ESG trends like renewable energy or circular economies. Alternatively, stewardship strategies involve using influence to drive and support changes that improve ESG and sustainability outcomes across index constituents.
ESG integration is driven by asset owners, who manage long-term investments with significant influence in financial markets. Legal scholars argue that such ESG investments might breach fiduciary duty for pension fund trustees by forgoing financial returns to pursue environmental and social goals (Cavaliere et al, 2021; Schanzenbach and Sitkoff, 2020). As such, reforms to normalize, standardize and make ESG criteria and disclosures transparent are urgently required.
