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ESG strategy is a critical component of socially responsible investing or socially conscious or ethical investing. It is an investment strategy that seeks to generate long-term competitive financial returns and positive social/environmental impact. Investors who employ this strategy often combine traditional stock analysis with the ESG criteria to make their investment decisions. The idea is that there are three distinct factors that can impact the well-being of a company, which are not necessarily captured in the financial records.
It’s no little surprise that ESG strategy is gaining traction as research has shown that this method of investment can reduce portfolio risk, generate competitive investment returns and help investors feel good about the stocks they own. In addition, research has shown that companies that exhibit favorable traits using the ESG strategy tend to perform better in the long run than countries that don’t. This is a critical reason that ESG issues are given critical consideration alongside financial factors in the mainstream analysis of investments.
What is the meaning of ESG?
To gain a better understanding of this strategy, let’s demystify the ESG acronym to highlight how investors use it for investment decisions.
E = Environmental
The E in ESG stands for Environmental, and it covers the variety of elements that illustrates the effects of a company’s activities on the earth in both positive and negative ways. It is also used to analyze the environmental risks of a company and how the company is managing the risks.
Why is the Environmental criterion important? If a company doesn’t handle issues related well, it may damage the areas of its operations, limits operational efficiency, and negatively influence its financial performance. Examples of issues that are considered under environmental in ESG strategy include waste and pollution, resource depletion, greenhouse gas emission, and deforestation.
S = Social
The S in ESG stands for Social, and it includes all the topics connected to how a company relates to people within and outside its walls. It examines the company’s relationships with other businesses and communities, as well as how the companies treat their employees.
Why is the Social criterion important? The way a company handles issues relating to the social criterion will affect its operational success positively or negatively. It will determine the chances of attracting new customers and retaining their loyalty, maintaining healthy relationships with employees as well as the relationship with the host community – all of which can impact the success of the company. Examples of ESG issues that are considered under social in the ESG strategy- include employee relations & diversity, working conditions, health and safety, employee relations and diversity, and stance on public issues.
G = Governance
The G in ESG stands for Governance covers everything related to how corporate management and boards relate to different stakeholders and how companies are run. It refers to a set of rules, systems, structures, and policies governing a corporation.
Why is the Governance criterion important? The manner in which a company is governed can go a long way to determine how conflicts of interest between the company’s stakeholders are avoided and how they are quickly resolved should they occur. This can also help avoid potential litigation expenses and how corporate risk is managed. Overall, transparent and proper Governance can determine the long-term success of any company. Examples of issues under Governance includes corporate risk management, corruption, and bribery, diversity of the board of directors and management, and more.
Why is ESG strategy growing?
With the greater recognition of the benefits of ESG as a strategy, investors are showing an increased interest in it. Although there are a number of strategies being used by asset managers, ESG strategy is ranked as one of the most popular ways of analyzing investment risks as it helps investors see how non-financial issues can affect the financial performance of companies. In turn, this makes it possible to determine the profitability of investment opportunities effectively.
ESG Strategy Wrap-up
Another key reason why ESG strategy is growing is the perspective of millennial investors who see it more as a core value in investing rather than an investment strategy. As a result, they tend to invest in companies that are environmentally and socially responsible than companies that are not.
For companies that plan to invest in ESG programs, ESG Enterprise has the right tool for them to start with for free.
What is ESG Strategy?
It is an investment strategy that seeks to generate long-term competitive financial returns and positive social/environmental impact. Investors who employ this strategy often combine traditional stock analysis with the ESG criteria to make their investment decisions. The idea is that there are three distinct factors that can impact the well being of a company, which is not necessarily captured in the financial records