ESG stands for Environmental, Social, and Governance. ESG investing has risen in need to several key global trends emerging from climate change to social unrest. The coronavirus virus, in particular, has intensified thoughts about the interconnectedness of sustainability and the financial system.
ESG investing considers a company’s environmental, social, and governance risks and opportunities that could have material impact on its performance, these factors are used to comprehensively expand upon and enhance the conventional measurements of company performance in informing investors decision-making.
ESG metrics are not commonly part of mandatory financial reporting, though some companies are increasingly making disclosures in their annual report or in a standalone sustainability report.
There is no one exhaustive list of ESG factors, however the list below provides an indicative list of relative factors.
ESG Factors
Environmental – Conservation of the natural world
- Climate change and carbon emissions
- Air and water pollution
- Biodiversity
- Deforestation
- Energy efficiency
- Waste management
- Water scarcity
Social – Considering people and relationships
- Customer satisfaction
- Data protection and privacy
- Gender and diversity
- Employee engagement
- Community relations
- Human rights
- Labor standards
Governance – Standards for running a company
- Board composition
- Audit committee structure
- Bribery and corruption
- Executive compensation
- Lobbying
- Political contributions
- Whistle-blower schemes
It is very difficult for an individual stock investor to identify and invest in shares based on ESG criteria in the absence of any readily available data. Hence, the next best approach would be to look for mutual fund schemes which follow ESG as a mandate.
Mutual Fund houses offering ESG funds have started to employ a variety of systematic approaches and alternate data sources to address ESG contemplations, including weighting to clients interest and probable values. Understanding the relative merits and limitations of different metrics can help an investor form a more complete picture of ESG risks and opportunities.
ESG investing is about investing responsibly where the management is very proactive and concerned about all the three factors and thus enhance shareholders overall value in the long run. To facilitate long-term, sustainable growth, it is imperative to analyse the mutual funds ESG performance and examine how activity in the markets influences the world in which we live.
As mutual fund investors, we all need to invest to meet our financial requirements and responsibilities. As a responsible global citizen we must evaluate our goals in our investments not only on the basis of financial parameters but also on certain good non-financial parameters and most importantly our core values.
Lastly ESG investing is important throughout the globe, if we consider the view that there are no investment returns at all on a planet left uninhabitable by climate change caused by global warming.
The information, analysis and opinions expressed herein are for education purposes only and are not intended to provide specific advice or recommendations. This material is not an offer, solicitation or recommendation to purchase any financial products or services. Always remember that all investments carry some level of risk, including the potential loss of principal invested.
