ESG stands for Environmental, Social and Governance, and refers to three central factors in measuring the sustainability of an investment.
This approach derives from the “Triple Bottom Line” concept, also known as “People, Planet and Profits” (PPP), which was introduced in the 1990s and according to which companies should focus not only on “Profits”, but on each of the three “P’s”, which are equally important to the sustainability of any business enterprise.
This concept evolved into the ESG factors, which today are the cornerstone of Sustainable and Responsible Investing (SRI). In this regard, we talked about it with Cristiana Falcone, who had already covered the delicate topic on her blog.
- What do ESG criteria do?
Environmental criteria examine how a company contributes to environmental challenges (for example waste, pollution, greenhouse gas emissions, deforestation and climate change) and its performance in this regard.
Social criteria look at how the company treats people (e.g.human capital management, diversity and equal opportunities, working conditions, health and safety, and mis-selling of products), while Governance criteria assess how a company is governed (for example, executive remuneration, tax strategy and practices, bribery and corruption, diversity and board structure).
The idea at the heart of ESG factors is simple: companies are more likely to be successful and generate excellent returns if they create value for all stakeholders.
Accordingly, ESG analysis focuses on how companies operate in society and how this affects their current and future performance.
ESG analysis is not only about what the company is doing today. An examination of future trends is essential and should inherently include disruptive changes that may have significant consequences for a company’s future profitability or its very existence.
- Why do many investors care about ESG?
Investors strongly believe that ESG factors improve risk-adjusted returns by reducing investments risk and creating value.
They believe that a well-run, responsible company that cares about people, customers and the environment is more likely to perform better and outperform peers if one does not exhibit these characteristics.
ESG analysis can provide valuable information on factors that can significantly affect a company’s financial parameters, allowing investors to make more informed investment decisions.
Taking ESG into account does not only mean evaluating the products and services provided by a company, but also its behavior, chain of production and other aspects related to its management.ESG analysis must also consider the future, concludes Cristiana Falcone, taking into account not only a company’s latest information, but also its strategy, its overall impact and evidence of compliance with its commitments and standards.