Environmental Social Governance
Environmental, social and corporate governance (ESG) is an evaluation of a firm’s collective conscientiousness for social and environmental factors, which is determined by a third party independent company. It is typically a score that is compiled from data collected surrounding specific metrics related to intangible assets within the enterprise.
ESG investing criteria examines what effect the company has on the environment, by assessing carbon emissions, hazardous waste and ecosystem change. Social factors are also considered such as does the company have a positive social impact, in regard to animal welfare and community relations. Governance is the final factor considered in terms of does the company board and management encourage positive change.
ESG analysis has become an increasingly important part of the investment process. Investors are incorporating ESG data into the investment process to gain a fuller understanding of the companies in which they invest. This is because an ESG assessment illuminates a company’s risk management and how the company manages its own operations to minimise its negative impact on the planet. Additionally assessing how its products and services contribute to sustainable development.
A company that integrates ESG into its long-term strategic planning will receive a higher ESG rating, this allows investors to understand a complete picture of the company’s prospective value. Additionally, by incorporating ESG analysis may allow companies to be better positioned to anticipate future operating environments, including potential costs and burdens to their existing business model.
There is not a standardized approach to the calculation or presentation of different ESG metrics. Investors can employ a variety of analytical approaches and data sources to address ESG considerations, including weighting to clients’ interests and potential value. Understanding the relative merits and limitations of different metrics can help to form a more complete picture of ESG risks and opportunities.
As there is no uniform ESG Rating system and assessment criteria it means that some companies can greenwash and falsely claim to have a good ESG score. Therefore, investors need to pay close attention to the methodology of the ESG assessment, to completely understand the company’s impact.