It is important to understand that ESG stands for Environmental, Social and Governance, because if we are going to shift to being a sustainable world, then ESG is is the cornerstone of the innovation that will get us there. These three things are often integrated into investments of companies that have higher ethical standards or best practices guidelines that create a more sustainable investment. An ESG strategy is a strategy that integrates environmental, social and governance issues into the portfolio management process. Often it means investing in companies with higher ethical standards or taking on board best practice guidelines to create more sustainable investments.
- What is the purpose of ESG?
- Why is ESG important?
- What is the difference between sustainability and ESG?
- What is an ethical investment?
- What is the difference between responsible investment and ESG?
- What are key factors for an ESG strategy?
- What is greenwashing in ESG strategies?
- Is ESG a marketing strategy?
- What makes a company ESG?
- What is greenwashing?
- How can ESG investing affect portfolios?
- How do you write an ESG strategy?
- What is an ESG checklist?
- How do I use an ESG checklist?
- In conclusion on ESG factors & ESG data
- Caveats, disclaimers & socially responsible investing
What is the purpose of ESG?
In order to implement an ESG strategy it is important to understand the purpose of ESG. ESG ensures that companies do not neglect important issues such as sustainability and ethics in their business activities. In turn, this often leads to a better end product for consumers and other stakeholders.
There is also a correlation between long-term investment strategies and positive environmental, social and governance outcomes. Sustainable businesses tend to be more profitable over time and they support the development of a stronger and more resilient economy. This is because sustainable companies focus on business activities that go beyond just making money, such as improving services for customers or addressing societal needs.
Why is ESG important?
ESG is important because we live in a globalized world where people expect businesses to be ethical, (Corruption Perceptions Index). If companies are not ethical, there are consequences for shareholders, stakeholders and the community as a whole. Business leaders cannot afford to ignore ESG issues because doing so will harm them in the long run. It is important that businesses consider all aspects of their business activities, including environmental, social and governance issues, because these factors have an impact on the company’s long-term profitability.
What is the difference between sustainability and ESG?
There are a few differences between sustainability and ESG. The most significant difference between the two is that companies can be sustainable without implementing an ESG strategy; however, it is very difficult to implement an ESG strategy without taking care of sustainability issues first. Another difference is that when companies apply sustainability to their business model they do this in all aspects of their company: from the way they produce their products to the way they interact with society. Sustainable companies take into consideration that their actions can have an impact on society. With ESG, businesses go beyond sustainability and incorporate social and governance issues in every aspect of business activities by taking care of these factors while making decisions about what they want to prioritize in their business model.
Sustainability is a process in which companies have to think about all the consequences their actions have. On the other hand, ESG asks companies to continue thinking about what consequences their actions can have and how they might be able to improve them. Whilst sustainability focuses on the long-term impact of business practices, ESG also takes into account whether management systems are sound. ESG is not just looking at the environment, but also management systems that are being applied to achieve sustainability objectives.
What is an ethical investment?
An ethical investment is when companies invest their money in products which have a positive impact on society or do not have negative consequences for the environment or employees. When people buy products from ethical companies they know that the company has good practices and is concerned about its impact on society.
Ethical investments are an important part of any ESG strategy (Why Green Investing is Important) because they incentivize companies to maintain high ethical standards so that customers will continue buying their products. Ethical investors also want to be sure that the company’s management systems uphold positive social and environmental impacts so they can assess the company’s performance.
Ethical investors are not only concerned with products, but also about working conditions for people involved in creating these products or services. They want to find out whether employees are treated fairly and if the human rights of workers are respected while producing goods.
However, it is very difficult sometimes to identify ethical companies and products because ethical investments are constantly changing.
What is the difference between responsible investment and ESG?
The main difference between responsible investment and ESG is that responsible investing usually refers to a single issue, such as environmental issues, while an ESG strategy often addresses many different aspects of business activities including social and governance issues. Both approaches suggest that companies should incorporate sustainability in their business model and apply best practices to achieve positive social and environmental impacts.
Responsible investing means thinking about the consequences every business decision has on the environment, society and other stakeholders involved in creating products or services. ESG is a strategy which requires companies to find out how they can maximize their impact on sustainable development through their products and practices.
It is important to know that one can be a responsible investor without taking into consideration social issues as well as environmental issues.
What are key factors for an ESG strategy?
The factors which define an ESG strategy are the extent to which an ESG approach is implemented, how it affects the portfolio and whether it goes beyond corporate engagement to actually incorporate ESG considerations in the investment decision (UK funds).
When having an ESG strategy, companies not only measure their environmental and social performance but also how it affects their business results. They need to integrate what they are doing into the portfolio management process so that they can take responsibility for their impact on society.
What is greenwashing in ESG strategies?
Companies which only look at environmental performance but not at social or governance issues are called Greenwashing companies. They try to create the impression that they are addressing green issues, but in reality contribute nothing towards sustainable development.
This is usually done by making their products look environmentally friendly without actually changing the production process. One famous example of greenwashing would be BP’s “Beyond Petroleum” campaign, where the company focused on green issues but didn’t change its product range at all.
By using this approach companies are able to generate positive brand impacts without having to take actual responsibility for their products or supply chain. They do not have to make any investments or changes if they don’t want to and it is easy for them to just look at environmental issues and neglect the social and governance impacts.
Is ESG a marketing strategy?
When a company has an ESG strategy and they invest in their workers and the community where they operate, this is called corporate social responsibility (CSR). The company does it because it wants to have a positive reputation among the general public. A good reputation generates trust from consumers which makes them more likely to buy from companies that are socially responsible.
In that sense, yes it can be used as a marketing strategy. Marketing is about having something of value to communicate with consumers. Doing good things for planet and people is something that you want to share and therefore can lead to profit. And it should lead to profit. Profit is how we can motivate companies to incorporate sustainable practices. If a company is not using sustainable practices, then they have not earned our support. The faster they make changes, the sooner we all profit by converting every company to sustainability.
What makes a company ESG?
The three tenets of ESG are economic, environmental and social. A company is considered to be ESG when it performs well in all three areas and if the performance of the business practice matches their stated mission and strategy.
- The environmental tenets are pollution measurement, emissions reduction, use of renewable energy sources and use of recycled materials.
- The social tenets are labour rights, health and safety, anti-discrimination and diversity.
- The governance tenets are good governance, board of directors composition and internal control processes.
- The economic tenets are profitability, stability, growth, sales growth and stock price appreciation.
It is easy for a company to focus on environmental issues as they can be measured quite easily with emissions or energy sources being the most common example. Social issues are a little harder because you have to measure labour rights with things like harassment counts or diversity figures. But it is hardest of all to measure governance issues because companies need to make sure they are above board with things like whistleblower protection, corporate social responsibility strategy and a policy for managing conflicts of interest.
What is greenwashing?
A company can have an amazing ESG score but if their actual performance doesn’t match their stated mission and strategy then they have greenwashed themselves. You can have a green product but if the company is polluting the environment with its factory processes it is not great for consumers as there may be health risks from using those products.
In your investment, you need to look at things like whether a company has been caught hiding behind greenwashing or if they have been shown to have issues that can affect their sustainability performance. For example, Ikea has been accused of using child labour in its supply chain, but as they have publicly acknowledged this and made the necessary investments to fix it, this has not had a significant impact on their ESG score.
Another example is Volkswagen who said that its cars were going to be greener because of new technology but then they cheated on the emissions tests so there were actually worse for the environment.
The ESG score given to a company isn’t something that you should take at face value, you need to look underneath it and see if their actual performance matches what they say they do. Because a strategy is not just about ethical behaviour but also about how well they can execute that strategy.
How can ESG investing affect portfolios?
A responsible investment strategy, such as an ESG strategy, reduces risk by avoiding companies which do not perform well in terms of economic and environmental issues. An important aspect is to keep companies accountable (International Financial Reporting Standards) and ensure that they do what they say they will because it is only when companies perform as promised that we can believe in their long-term strategy.
So buying low carbon, socially responsible and sustainable stocks is a great way to reduce risk by avoiding companies which do not have the best ESG track record or who could potentially damage your portfolio. On the other hand, this is the 4th Industrial Revolution and the only way out of our current predicament is to innovate. Innovation means the opportunity for greater risks and greater rewards. In the next 20 years, innovations on the scale of the turning of the last industrial revolution will happen.
How do you write an ESG strategy?
To write an ESG strategy, you need to focus on the 5 tenets of ESG investing which are environmental, social, governance, economic and investment policy.
In terms of ESG scores, a company can have a rating from 0-100% but it is important to look at their actual performance as companies with a high rating could just be greenwashing or social washing themselves or not putting in much effort to perform well. A company could have a high rating because they are good at talking about ESG issues rather than actually doing a lot to improve them.
For example, a big issue is the amount of waste that is produced by trading houses as the carbon footprint from this waste exceeds that of airlines which can be an environmental disaster if not dealt with. However, the fact that they are highlighting this issue is a positive step even if it’s not enough to actually solve the problem
You need to have a solid understanding of what ESG investing is and how you can integrate it into your investment strategy so that you know which companies will benefit from being sustainable and which ones won’t. It is also important to keep up with the latest research in ESG investing in order to ensure that you are putting your money into companies who are taking action.
By using ESG strategies when looking for investment opportunities, it can help reduce portfolio risk, leaving investors with a lower overall level of risk which is great for long-term portfolios.
What is an ESG checklist?
An ESG checklist is a document that provides an overview of the ESG and non-ESG performance and includes details about management, risks and opportunities. This helps compare companies to other similar businesses as well as benchmarking against industry competitors.
By undertaking this kind of due diligence upfront rather than just trusting what you read means that you can focus on the companies who are most likely to deliver reliable, sustainable and ethical returns.
When investigating, it is important to use a numerical scale from 1-5 in order to give more consistency. Using this kind of checklist will help you interview potential investments efficiently and talk about their strategies in a structured way. In addition, it provides a great reference tool that can be used over and over again.
How do I use an ESG checklist?
A great way to use the above checklist is to talk to stakeholders who are working with the company directly, including employees or suppliers. They can provide you with information on how ethical the company is and if they follow best practice guidelines that you can implement into your investment policy.
Once the list of questions has been created, if there’s a high level of correlation between what stakeholders say and what you feel about the company on an ethical basis, then you know you’ve found a good match for your research and investment process.
If you have a company that has a low score on your list of questions, think about what steps the company could take to improve their ESG scores. Are they open to being challenged? Do they have any initiatives in place already that could be expanded upon? If so, then look into those first as it will provide a quick win for the company. If they aren’t open to suggestions or are unwilling to make changes, then it may be best to look elsewhere for an investment opportunity.
When reviewing the ESG of a potential investment, think about how this impacts your own personal standards and whether it aligns with what you want from your fund or not. It’s important that you make a conscious decision on this rather than going with the flow, as it will impact your investment portfolio in a negative way if you make decisions without thinking about how they align with your values.
Lastly, when you’re doing research always use numbers and other information to back up any opinions that you have. This way there’s no chance of contradicting yourself later on down the line!
In conclusion on ESG factors & ESG data
Because ESG strategies are about more than just ethics, they reduce risk by avoiding companies which do not perform well in terms of economic and environmental issues. You want to find stocks that have potential for greater rewards but with less risks because innovation is key to our future. Plan your work, and work your plan.
Caveats, disclaimers & socially responsible investing
At ESG | The Report, we believe that we can help make the world a more sustainable place through the power of education. We have covered many topics in this article and want to be clear that any reference to, or mention of socially responsible investing vs climate related financial disclosures, investment funds in relation to enterprise risk management across multiple sectors or stakeholder groups vs local communities on impact investing in the context of this article is purely for informational purposes and not to be misconstrued as investment advice or an endorsement. Thank you for reading, and we hope that you found this article useful in your quest to understand ESG and sustainable business practices. Long live planet earth.
Research & Curation
Dean Emerick is a curator on sustainability issues with ESG The Report, an online resource for SME’s and Investment professionals focusing on ESG principles. Their primary goal is to help middle market companies automate Impact Reporting with ESG Software. Leveraging the power of AI, machine learning and AWS to transition to a sustainable business model. Serving clients in the United States, Canada, Uk, Europe and the global community. If you want to get started, don’t forget to Get the Checklist! ✅