What is ESG Investing: ESG stands for Environmental, Social and Governance. These are the three factors on which a company is rated by a third party or a research company. These represent the sustainability of the company in terms of its operations effect on the Environment, the social position of the company and the Corporate Governance standards within the company.
The companies which are rated top in terms of ESG ratings are the companies that are considered to be Sustainable companies. Investing in these companies for long term wealth creation may also be called Sustainability investing or ESG investing.
In ESG investing, you will invest your money in the companies which are working towards making the world a better place by having less impact on the environment from its operations, having a socially responsible behaviour towards the society and maintains Responsible corporate governance standards within the management of the company.
What does each of the term ESG mean, Here’s a closer look at these three criteria which are used to rate the companies for ESG investing
As the term indicates, this term evaluates the environmental impact that had on the company operations. The criteria that are considered are the company’s carbon footprint, toxic chemicals whcih are involved in the manufacturing processes and also sustainability efforts that are employed in the suply chain of the company. All these are analysed with respect to the company and evaluated the environmental impact of the company and the sustainbility of the operations of the company.
How does the company improve its social impact, both within the company and in the broader community? Social factors include everything from LGBTQ+ equality, racial diversity in both the executive suite and staff overall, and inclusion programs and hiring practices. It even looks at how a company advocates for social good in the wider world, beyond its limited sphere of business.
Governance indicates, how responsible the companies management is towards the Company’s vision and mission, and how effectively employees are motivated and working with the organization towards the shared goal. How do the company’s board and management drive positive change? Governance includes everything from issues surrounding executive pay to diversity in leadership as well as how well that leadership responds to and interacts with shareholders.
How are ESG scores Calculated?
Bloomberg, S&P Dow Jones Indices, JUST Capital, MSCI and Refinitiv are a few of the most well-regarded ESG research companies. Scores generally follow a 100-point scale: The higher the score, the better a company performs in fulfilling different ESG criteria. Scores may vary among firms, which may employ different metrics and weighting schemes.
While the specific factors assessed vary by company, ESG rating firms commonly review things like annual reports, corporate sustainability measures, resource/employee/financial management, board structure and compensation and even controversial weapons screenings.
Why to Invest in ESG companies
If you observe the world around you, you will notice that there are many companies that fail because of failure in certain aspects that affect largely the companies operations moving forward.
With the changing world dynamics, the companies must adopt sustainable growth and hence in that regard, the ESG criteria are effective in evaluating the sustainable long term growth of the company.
A company which is having serious environmental impact will constantly receive backlash from both the government in terms of a lot of regulations and restriction and also a backlash from the community around and its users. These eventually affecting the companies revenues. Hence the growth will be in question.
And also if the governance of the company is below the par, then there are serious doubts regarding the responsible nature of the senior management towards the investor’s community interests and also towards the company shared vision. Hence having a good
How to Invest in ESG companies
You can Constantly get updated about the good ESG companies from the top research agencies. Based on these ratings and reports from these companies, you can constantly update your portfolio by investing in top ESG standard companies.
But if you don’t want to take the job of constantly getting updated with the ESG companies, you can invest in ESG funds. ESG funds are those funds, which invest the amount in the companies which are rated top in terms of ESG ratings.
Investing in ESG investing has a lot of critics and many claims that the ratings are not a good indicator to select companies for investing. If you carefully observe the returns by investing in ESG companies and other good growth companies, you will find that ESG is not a good indicator for good returns.
But ESG will always be a good indicator regarding the companies sustainable growth in the future.