Environmental, Social, and Governance investing
ESG stands for environmental, social, and governance. ESG investing refers to how companies score on these responsibility metrics and standards for potential investments. Environmental criteria gauge how a company safeguards the environment. Social criteria examine how it manages relationships with employees, suppliers, customers, and communities. Governance measures a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
Definition: ESG stands for Environmental, Social, and Governance. ESG investing refers to evaluating potential investments based on a company's performance in these responsibility metrics and standards. Environmental standards measure how a company protects the environment. Social standards assess how a company manages relationships with employees, suppliers, customers, and communities. Governance standards evaluate a company's leadership, executive pay, audits, internal controls, and shareholder rights.
Origin: The concept of ESG can be traced back to the 1960s with Socially Responsible Investing (SRI). However, ESG as a distinct investment framework was first introduced in the 2004 report “Who Cares Wins” by the United Nations Global Compact and the Swiss government. Since then, ESG has become a crucial standard for global investors to assess a company's long-term value and risk.
Categories and Characteristics: ESG investing can be divided into three main categories: Environmental (E), Social (S), and Governance (G).
1. Environmental (E): Focuses on a company's performance in areas like climate change, resource management, and pollution control.
2. Social (S): Focuses on a company's performance in areas like employee welfare, community relations, and customer privacy.
3. Governance (G): Focuses on a company's performance in areas like board structure, executive compensation, and shareholder rights.
The characteristic of ESG investing is to consider both financial returns and social responsibility, aiming for sustainable development.
Specific Cases:
1. Case 1: Tesla: Tesla excels in environmental performance by producing electric vehicles and renewable energy products, reducing carbon emissions. However, it has faced criticism in social and governance aspects due to issues with employee treatment and management decisions.
2. Case 2: Unilever: Unilever performs well in both environmental and social aspects, implementing sustainable development plans, reducing environmental impact, and actively engaging in community building. In terms of governance, Unilever maintains a transparent and efficient management structure.
Common Questions:
1. Does ESG investing affect financial returns?: Research indicates that ESG investing does not significantly reduce financial returns and may provide more stable long-term gains.
2. How to evaluate a company's ESG performance?: Investors can refer to ESG ratings from third-party agencies like MSCI, Sustainalytics, or use ESG reports published by companies.
