What is Environmental, Social, and Governance investing?

1097 reads · Last updated: December 5, 2024

ESG stands for environmental, social, and governance. ESG investing refers to how companies score on these responsibility metrics and standards for potential investments. Environmental criteria gauge how a company safeguards the environment. Social criteria examine how it manages relationships with employees, suppliers, customers, and communities. Governance measures a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

Definition

ESG stands for Environmental, Social, and Governance. ESG investment refers to evaluating companies based on their scores on these responsibility metrics and standards for potential investment. Environmental standards measure how a company protects the environment. Social standards examine how a company manages relationships with employees, suppliers, customers, and communities. Governance standards assess a company's leadership, executive pay, audits, internal controls, and shareholder rights.

Origin

The concept of ESG originated from Socially Responsible Investing (SRI) in the 1960s when investors began to consider the social impact of companies. In 2004, the United Nations released the report "Who Cares Wins," formally introducing the ESG concept and promoting its global adoption.

Categories and Features

ESG investment can be categorized into positive screening, negative screening, and impact investing. Positive screening involves investing in companies with high ESG scores; negative screening excludes companies with low ESG scores; impact investing focuses on companies that have a positive impact on ESG factors. ESG investment is characterized by a focus on long-term sustainability and risk management.

Case Studies

A typical case is Tesla, which scores high on environmental factors but has faced criticism for governance issues related to its management. Another example is Unilever, which has been favored by investors for its efforts in sustainability and social responsibility.

Common Issues

Investors often misunderstand ESG investment as merely an ethical choice, overlooking its potential in risk management and long-term returns. Additionally, the lack of standardization in ESG scoring can lead to inconsistencies in how different companies are rated.

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Loss Carryback

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Loss Carryforward

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Net Sales

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