ESG: it’s a small acronym with big meaning in today’s market. Now more than ever, investors are considering a company’s environmental, social and governance performance in their decision-making. Taking this approach was once a niche way to align investments with personal values. Now a growing group of investors recognize that a company’s ESG profile reveals key need-to-know details — including potential risks and opportunities.
The ABCs of ESG. What influences ESG? In terms of ‘environmental’, a range of sustainability and stewardship factors play in. That includes how a company uses energy, resources, water, and how it mitigates waste. Investment in green products and technology positively affects a company’s ESG profile, as does maintaining positive relationships with environmental bodies.
On the ‘social’ side, investors want to see that a company treats others fairly. That includes employees – matters like pay, benefits, treatment, harassment policies and diversity are key ESG indicators. Ethical and dignified treatment of consumers, as well as those in a company’s supply chain is also important. Lastly, a company’s relationship with its community can also impact its ESG profile.
For ‘governance’, matters like quality managerial structure, strong corporate accountability, diversity in leadership and good risk management come into play.
Many companies are self-reporting their ESG progress in their annual reports, or in standalone reporting. ESG has become so vital that that last fall, the World Economic Forum released a much-heralded white paper in an effort to standardize those reporting metrics.
No longer niche. Now a must. Socially and environmentally-aware companies were once considered a niche investment portfolio. That’s no longer the case. Investors – and the world – take note of companies with strong ESG principles. Take tech chip producer Nvidia, considered one of the top ESG performers in the market today. Its strategies range from ensuring diversity in its talent pool to using conflict-free minerals in its products.
Top investment firms are singing the praises of analyzing companies through a ESG lens: Goldman Sachs says an ESG focus has become essential for long-term compounding and Morgan Stanley points to a growing body of research that shows resource-efficient companies enjoy higher financial returns, high levels of innovation, and returns on assets and equity.
All that, and making the world a better place. What’s to lose?