Environmental Social Governance (ESG): What is it?

When it comes to Risk Management and investment, Companies should keep a close eye on Environmental, Social and Governance (ESG).

Over the last 2 years (since 2017), I have been providing my support and expert services as a Risk Management Specialist to a Client who in turn supports Clients investing in emerging markets. Impact investment and Environmental, Social Governance (ESG) have been a really important feature when it comes to making investment decisions for the conscious investor as part of a Corporate Strategy.

But what is ESG? Should you be doing something about it?

Let’s break it down…

What is Environmental, Social and Governance (ESG)?

Good ‘ol Wikipedia provides the following definition:

Environmental, social and corporate governance (ESG) refers to the three central factors in measuring the sustainability and ethical impact of an investment in a company or business

Concerns regarding Environmental, Social and Governance are prolific.  For example:

  • Environmental = Climate Change, Nuclear Energy and Sustainability
  • Social = Diversity, Human Rights, Consumer Protection, Animal Rights
  • Governance = Management Structure, Employee Relations, Executive Compensation, Employee Compensation.

In the modern age, with access to vast online resources and social media capability for everyone, focus on Companies and potential risk exposure is huge.

If you are an investor and you want to survive, you definitely need to make sure that your “moral compass” is pointing in the right direction and that your company is doing the right thing i.e., managing those risks.

But how…for a start, we could do with some ESG criteria.

Risk Management with Environmental, Social and Governance (ESG) Criteria

The Environmental, Social and Governance (ESG) criteria (or standards) could be used to screen potential investments.

Criteria have grown popularity as investors seek assurance on companies that they are investing are not posing high and unnecessary risks.

With screening criteria, investors can use them as a gateway process for “go/no go” when it comes making the investment decision.

Typical Criteria Examples for Environmental, Social and Governance (ESG)

Whilst not exhaustive, the following are typical examples of criteria that can used for ESG screening:

Environmental

  • Company’s energy use.
  • Waste management (e.g., disposal of hazardous waste).
  • Pollution profile (e.g., air emissions).
  • Natural resource conservation plans.
  • Treatment of animals.
  • Issues related to its ownership of contaminated land.
  • Regulatory compliance with Environmental Laws.

Social

  • Company’s business relationships.
  • Local communication plans and interactions.
  • Volunteering services.
  • Working conditions (Health and Safety aspects).
  • Stakeholder’s involvement.

Governance

  • Transparency with regard to accounting methods (e.g., disclosure of gifts and donations).
  • Conflict resolution process and track record.
  • Anti-Bribery and Corruption (ABC) profile and status.

Should you be doing something?

The above is just a quick overview on what is Environmental, Social and Governance (ESG).

Of course, if you are an investor in an emerging or developed market you would want to make sure you are not only doing the right thing but also making sure you are aware of and managing the risks associated with that Company.

After all, you are not investing for the fun of it….you are expecting a Return On your Total Investment (ROTI)

Why gamble with your investors and your money…apply ESG Criteria, do the screening and make sure you know where your “icebergs“.

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