Sustainable Investments: An Overview of ESGs
The acronym “ESG” is an abbreviation for Environmental, Social, and (Corporate) Governance. These three broad non-financial areas of interest are often associated with “socially responsible investors,” who specifically seek companies that incorporate their values and concerns with ESG merits into their selection of investments instead of potential profitability and risk presented by an investment opportunity. While companies now offer free Best ESG Companies lists and ESG Indexes, there is no all-encompassing list of all ESG factors. Many ESGs interlink each other; however, some factors can be associated with each term.
The environmental aspect of ESG looks at how some operations affect nature and the environment, ranging from the pollution a company emits, waste management, animal welfare and treatment, biodiversity, deforestation, and their usage of natural resources. The social factor of ESG examines a business’s relationship with its employees, suppliers, customers, surrounding communities, and other stakeholders, such as the company’s impacts on employees’ health or safety and how much they care about the local communities. The governance aspect of ESG focuses on shareholders’ rights and the company’s overall leadership, including companies’ transparency about their accounting behavior or when navigating a conflict of interest. This way of investing has been coined “sustainable investing” since the impact of a specific action on a wide array of factors associated with the ethics of a company’s actions. While not mandated by law, many companies have increased their ESG efforts as a new method to attract new investors, simultaneously letting investors avoid investing in companies that commit severe harm, such as oil spills or other scandals.
While many of these factors can be measured, there can be difficulty assigning monetary value and accuracy to such statements and possible allegations of greenwashing. In response to this issue, the Securities and Exchange Commission recently created the Climate and ESG Task Force in the Division of Enforcement. Under existing restrictions, the task force will produce an initiative that ensures that any misconduct including any misstatements or materials gaps in any publishing of climate risks. This task force will also observe and disclose all things related to advisors of investments and will fund ESG methods. The Climate and ESG Task Force will also seek certain ESG- related problems such as whistleblower complaints. It is foreseen that the SEC will increase its presence in this growing area of investment. For additional information on this topic, see Environmental, Social, and Governance: What Is ESG Investing?