ESG, also known as environmental, social, and governance is on the rise all over the world. We are seeing an increase in the importance of ESG factors because they are now playing into investments and decision-making for companies. Considering these factors helps investors and companies alike align interests and improve the world.
What is ESG?
ESG criteria are easy to understand if you simply break down the three letters. Investopedia describes ESG as “a set of standards for a company’s operations that socially conscious investors use to screen potential investments.” This set of standards looks at non-financial issues that have financial importance. ESG factors are considered because topics under environmental, social, and governance are essential to consider when investing. Environmental criteria is a way for investors and companies to evaluate practices on climate change, pollution, conservation, and animal treatment. This is also true for social factors such as business relationships, company culture, and working conditions and governance factors like transparency, stockholder participation, and conflicts of interest.
Financial Importance
So why is ESH financially significant? All of the criteria listed can bring about concerns of financial risk as well. ESG topics are heavily considered when investing because they have a financial impact in today’s economy. It’s now common practice for ESG to be “integrated in the risk-return analysis of investment opportunities,” according to Investment News. Companies that have good ESG criteria tend to have better returns on investment. Integration of this criterion all over the world is now considered a fiduciary duty. Multiple studies over the years have shown that good financial results stem from corporate sustainability performance.
Since its beginnings in 2004 ESG criteria has grown in popularity, it has brought about a commitment to sustainability for many companies and investors worldwide. Today, investors and companies have tools for integrating ESG criteria into the business framework. This only heightens the importance of the commitment to sustainability and transparency. ESG gives corporations the opportunity to contribute globally while maintaining transparency about practices involving environmental, social, and governance issues.
