ESG in Business

Sooyeon Lee

                  These days many people are talking about ESG, ESG investment in business. So, what is ESG? Why is it so important? Let’s take a look at the definition and some factors of ESG.

What is ESG?

                  ESG refers to environmental, social and governance—describes areas that characterize a sustainable, responsible or ethical investment. The Financial Times Lexicon defines ESG as “a generic term used in capital markets and used by investors to evaluate corporate behavior and to determine the future financial performance of companies.” It is used by investors to evaluate corporations and determine the future financial performance of companies. It also adds that ESG are a subset of non-financial performance indicators which include sustainable, ethical and corporate governance issues such as managing a company’s carbon footprint and ensuring there are systems in place to ensure accountability. They are factors in investment considerations, used in risk assessment strategies incorporated into both investment decisions and risk management processes.

ESG investing

                  ESG refers to a class of investing that is also known as “sustainable investing.” This is an umbrella term for investments that seek positive returns and long-term impact on society, environment, and the performance of the business. There are several different categories of sustainable investing. They include impact investing, socially responsible investing, ESG, and values-based investing. Another school of thought puts ESG under the umbrella term of SRI. Under SRI are ethical investing, ESG investing, and impact investing.

ESG factors

                  ESG are three central factors in measuring the sustainability and ethical impact of a company. ESG factors, though non-financial, have a material impact on the long-term risk and return of investments. ESG is incorporated into risk mitigation, compliance and investment strategies. Companies that use ESG standards are more conscientious, less risky and are more likely to succeed in the long run.

According to Environmental, Social and Governance Issues in Investing, there is a lingering misperception that the body of empirical evidence shows that ESG considerations adversely affect financial performance. For investment professionals, a key idea in the discussion of ESG issues is that systematically considering ESG issues will likely lead to more complete investment analyses and better-informed investment decisions.

                  Responsible investors evaluate companies using ESG criteria as a framework to screen investments or to assess risks in investment decision-making. Environmental factors determine a company’s stewardship of the environment and focus on waste and pollution, resource depletion, greenhouse gas emissions, deforestation, and climate change. Social factors look at how a company treats people and focuses on employee relations and diversity, working conditions, local communities, health and safety, and conflict. Governance factors take a look at corporate policies and how a company is governed. They focus on tax strategy, executive remuneration, donations and political lobbying, corruption and bribery, and board diversity and structure.