Updated on March 1, 2023
Environmental/Social/Governance or ESG Investing is a relatively new concept which refers to the consideration of factors like environmental, social and governance along with financial factors in the investment decision-making process. ESG investing is about applying these non-financial, but impactful factors to stock or investment analysis for identifying risks and future opportunities.
Environmental factors include: Climate change and carbon emissions, air and water pollution, energy efficiency, waste management, water scarcity etc.
Social factors include: Customer satisfaction, data protection and privacy, gender and diversity, employee engagement, labor standards etc.
Governance factors include: board composition, audit committee structure, executive compensation, political contributions, whistleblower schemes etc.
Some key ESG features are:
1. ESG factors are often interlinked, but there is no clear definition or provision to clearly define the value ascribed to these factors.
2. ESG metrics are not part of mandatory financial reporting, though some companies are making disclosures in their annual report or in a separate sustainability report
3. ESG data would include a company’s carbon emission levels, water consumption or customer privacy breaches.
4. Institutional as well as retail investors, specifically millennial investors, look closely at sustainability and social responsibility disclosure information to assess the company’s management and its business performance.