What Is ESG Investing? Learn More About ESG Investing
Oct 12, 2022
5 min read
ESG investing has grown in popularity since 2006 and hit another major boom in 2020 due to the pandemic. But there is still some confusion about what exactly defines ESG and ESG investing.
ESG is a method of determining whether a company has good business practices that support the environment, their workers, and lead the business as a whole.
Continue reading below to learn more about ESG principles, ESG company values and what to look for when investigating ESG investments.
Table of Contents
What Does ESG Stand For?
ESG stands for “Environmental, Social, and Governance”. These are the three main ways to determine how companies are doing sustainably.
Many investors that are conscious of the problems in the world are now taking steps to learn more about the companies they are supporting and trying to determine if they are helping the planet and the people living on it.
While this is not a new idea, there have been various sorts of policies and ideologies about supporting good business practices even back since the Quakers.
More recently, this practice gained popularity in 2006, and then again it grew in 2020 when businesses were facing uncertainty and disruption due to the pandemic. During this uncertain time, those businesses and stocks with good ESG practices were deemed more resilient.
What are ESG Companies?
Unfortunately, there is no global, or even country standard for determining ESG companies. So when a person or group is investing, they must determine for themselves what companies are following ESG practices.
There are some companies that are frequently agreed upon, however.
When looking at companies, you are just looking at how they are doing as a whole as far as ESG practices. You aren’t necessarily looking at the stocks yet, but their practices.
People also hope that this will promote companies to begin behaving more responsibly and making better choices for their employees and the environment. However, some people worry that instead, it will just promote big businesses to hide their decisions and not make sustainable choices.
There are companies that want to make the right choice, however, and having basic guidelines that people hold can help businesses learn where they need to grow and make positive decisions.
And thankfully, in modern society where communication can be done instantaneously, it is hard for businesses to keep their practices hidden for long, especially when concerned citizens and disgruntled employees are involved.
How to Evaluate Corporate ESG Performance
When evaluating corporate ESG performance, it is important to look at all three sides of the business. You don’t want to just take in one side, or ignore how a business is handling environmental and social just because they are doing good on their government side.
You will want to look at all three to determine how a company is treating the environment and planet earth, its people and workers, and how it is doing as a leader and business practices.
If you break it down, you can look for certain things in each section. These are questions you can ask yourself before investing in a company.
- What are their opinions on climate change?
- How many Greenhouse Gas Emissions (GHG) do they release?
- How many unsustainable resources do they deplete?
- Do they make an effort to offset their carbon footprint?
- Are they taking steps to reduce their waste and pollution?
- Are they being water and energy efficient?
- Are they involved in deforestation, and how are they handling it?
- Are toxic chemicals being leached into the planet or wrongfully disposed of?
- Are there steps to promote sustainability throughout the supply chain?
- Do they provide equal opportunities?
- Is there equality for LGBTQ+ people?
- Do they support basic human rights or even go above that?
- What are their health and safety policies?
- Are their employees diverse?
- Does the diversity extend up the social ladder, and not just the basic workers?
- Does this business advocate for social good?
- Do they get involved in the community?
- Do they make sure they do not use child labour and/or slavery to make their products?
- How are the working conditions?
- Do they have a history of bribery and corruption?
- How does the company’s board drive positive change?
- What does the pay scale look like?
- Are the chairman and CEO roles different?
- How are board votes decided?
- How transparent are shareholder communications?
- Are there compensations, bonuses, and perks?
- Is there an open history of shareholder lawsuits?
- How is this business's relationship with regulatory groups and bodies?
- How does the leadership interact with and respond to shareholders?
Conclusion: ESG Investing
Now that you understand that ESG stands for Environmental, Social, and Governance, you can start investing in businesses that have these practices. Though there is no standard rule for what an ESG business is, there are some questions you can ask about the business to see if they are heading in the right direction.