Investing 101: What does ESG Stand For?

what does esg stand for environmental social governance compliance

How conscious do you feel about the environment? How does ethical investing sound? If you're all for it, then you could get into the multi-billion industry that is ESG investing. 

ESG investing topped $30 trillion in 2018 and is estimated to hit $50 trillion in the next decade or two.

So what does ESG stand for? This is what we'll guide you through in this post and help you understand everything you need to know about it. Armed with the right information, you can make the right decisions about joining the ESG bandwagon as it's gaining momentum.


What Does ESG Stand For?

ESG stands for Environmental, Social, and Governance. These are the three criteria that act as central factors in measuring and evaluating the sustainability and societal impact of investments in businesses. The environmental criteria measure how companies interact with nature.

Societal criteria measure how the company interacts with employees, consumers, suppliers, and surrounding communities. Governance criteria involve the leadership of the business, executive pay, shareholder rights, internal controls, and audits.

In the past several years, investors, especially young people, have shown interest in putting their money in companies and financial products that follow the ESG criteria. ESG may also be referred to as sustainable investing, impact investing, responsible investing, and socially responsible investing.


How Does ESG Criteria Work?

There is a wide range of behaviors you should look for in a company as an investor to assess whether they are based on environmental, social, and governance.


Environmental

Some of these behaviors include energy use, pollution, waste, animal treatment, and natural resource conservation. You can use this criterion to evaluate the environmental impact a business may face and in what way they manage those risks. 

For instance, check whether a company owns a contaminated piece of land. How do they dispose of hazardous waste? How do they handle toxic emissions? Do they comply with government environmental regulations?


Social

When it comes to the social criteria, check the business relationships the company is involved with. Do their suppliers hold the same values as the company? Do they participate in charitable events and give back to their local communities?

Do their employees engage themselves in voluntary work? How about the working conditions in their offices or premises? Are they safe for the employees and customers alike? Does the company take into account stakeholders' interests or not?


Governance

When it comes to governance, check whether the business is transparent and uses accurate accounting methods. Do stakeholders have a say about what decisions are made. It's in your best interest to get assurance that the business avoids conflict of interests when it comes to the board members. 

Also, ensure they don't engage in illegal dealings, and that they avoid political contributions to obtain favors.

Of course, it's not possible for a business to pass all tests in all categories, so as an investor, you need to decide which criteria are most important to you.


The Upsides and Downsides of ESG Investing?

In the past few years, ESG investing has had a reputation that investors need to trade-off. Given that this is a type of investment strategy that limits the number of companies or businesses you can invest in, it may limit your potential profits. Companies that don't engage in ESG may perform way better than companies that do when it comes to stock prices.

However, investors are realizing that ESG criteria have a larger role to play than just making them profits. The practical purpose is way beyond ethical concerns. When you follow the environmental, social, and governance criteria, you'll be avoiding companies that come with risk factors. 

These factors include things like oil spills and emission scandals. These affect stock prices and result in significant losses. Check out these ESG trends to find out more.


Why Invest in Companies That Practice ESG Criteria

Businesses taking environmental, social, and governance aspects seriously are managing their companies better and conducting their business in a sustainable way, meaning they have the future in mind. A company that has a high ESG rating is more crisis resistant and performs so much better compared to their peers.

Investing in ESG makes you feel good about yourself as you have an ethical holding. When you invest in a company that shares your values and provides socially responsible solutions, you'll not only benefit financially but emotionally as well. Even better, you can expect high future profits because more and more people are becoming ethically driven in the purchasing decisions they make.

Beyond that, this is a catalyst for change. As more investors back socially responsible businesses, others will feel pressured to follow suit to attract funding. With time, more companies will follow sustainability practices, which will be great for the environment.


What Challenges Does ESG Face?

ESG is still relatively new, and hence challenges are expected. To begin with, this is not a passive strategy and you must research prospective businesses to ensure they align with your financial goals and values. This can be tricky, depending on how large you want to protect your investment portfolio.

This may also not be an optimal strategy if you're looking for huge financial returns. You might be sacrificing your gains should you invest ethically. You may want to invest in other conventional investments, then contribute some of your proceeds to charity instead. 

On top of all this, you may be facing higher fees for ESG investments due to the necessary research involved.


Is ESG Investing Right For You?

So, what does ESG stand for? We have learned that it's environmental, social, and governance investing, which is a sustainable investment strategy. Is this type of investment strategy for you? 

You have to conduct research and consider all aspects before making a final decision. If the environment means a lot to you and you cannot invest in a company that compromises it, then ESG is for you. If you feel that a company should be charitable and treat employees well, then ESG is most for you. 

If you want to work with a business that's ethical in aspects such as taxes, then invest in ESG. Still, consider the financial impact and the possibility of minimal profits depending on the company or investment criteria. 

Kindly check out our other articles for more comprehensive guides on being a more eco-friendly business. Now that you know what ESG stand for, you can read more of our articles on sustainability, renewable energy, electric vehicles, solar power, and waste management.

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