ESG stands for environmental, social, and governance, which are the three central factors in measuring sustainability and societal impact of an investment. The concept of socially responsible business behavior is not new; it is controversial and is difficult to measure. Investors should be aware of this issue and recognize that, to a considerable degree, acceptance is often associated with individual values. ESG investing recognizes the importance of environmental, social and governance issues, in addition to the more traditional assessment of financials, in evaluating investment opportunities.
Environmental includes a variety of elements that illustrate a company’s impact on the Earth, in both positive and negative ways.
Social consists of people-related elements like company culture and issues that affect employees, customers, consumers and suppliers, both within the company and society at large.
Governance deals with the performance of company directors, management and shareholders, and how they relate to various stakeholders.
The idea of including personal beliefs in the investment assessment process is not new. Historically, many investors have chosen to avoid certain economic activities, such as gaming, liquor, etc., and countries with unacceptable political practices.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA