ESG

Quick definition

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Updated: Jan 20, 2023

Environmental, Social, and Governance (ESG) is an investment strategy that focuses on socially conscious factors and outcomes.

Key details

  • New-age investors prioritise sustainability and use an ESG values-based approach when adding to their portfolio
  • Employing an ESG approach aids investors in avoiding companies that pose a greater financial risk because they are not socially responsible
  • Many companies, funds, brokerages, and financial advisers now offer products and services that prioritise ESG

What is ESG?

ESG is an increasingly important investment strategy where the investor only puts money into companies that perform well on environmental, social, and governance issues. It has grown more popular in recent years, particularly with younger investors who put money into what they value.

Socially conscious investors can screen whether or not a company qualifies for ESG investing by using guides that rates them against each component. This type of investing is also referred to as sustainable investing, responsible investing, impact investing, and/or socially responsible investing. 

Demand for ESG investing particularly rose during the pandemic in 2020. Research shows that investors held $17 trillion in assets that employed ESG criteria at the beginning of 2020 – a significant increase from $12 trillion in 2018.

Environmental

The Environmental component of ESG appeals to investors concerned with corporate initiatives that support a greener planet. Companies can adopt a range of best environmental policies in order to comply with ESG standards. Here are some examples of policies they may adopt:

  • Publishing updated reports on carbon and environmental sustainability
  • Reducing energy usage
  • Treating animals ethically
  • Lowering greenhouse gas emissions

Social 

The Social element of ESG is concerned with Corporate Social Responsibility (CSR). The prototype socially responsible company exhibits behaviours such as:

  • Donating a proportion of its revenues to philanthropic causes
  • Paying fair wages
  • Encouraging employees to volunteer in their local community
  • Demonstrating health and safety concerns for employees in the workspace

Governance

The Governance component of the ESG criteria is concerned with the fair and just management of a company. For instance: 

  • Maintaining transparent accounting practices
  • Offering shareholders a right to vote on imperative issues
  • Promoting diversity and inclusion in the workspace
  • Employing a CEO independent of the board

Where can I learn more?

For more information about ESG, and other key financial concepts, check out our stock market course page. To learn more about investing, our helpful courses will take you through everything you need to know about stocks and investing


Sources & references
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Srijani Chatterjee
Financial Writer
Srijani is the quintessential Third Culture Kid having grown up in India, Singapore, Malaysia, The Netherlands, Scotland, and England. She still loves to travel and speaks… read more.