ESG Strategy that Works

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