Environmental, social, and governance (ESG) refers to three central factors in measuring the sustainability and ethical impact of investments. A growing number of investors rely on these factors to determine whether they ultimately want to invest, or continue to invest, in a given business. The practice places value on companies’ choices to be environmentally conscious, ethically aware, and forward-looking. While ESG investment may be characterized as ethical in its approach to capture environmental and social impacts, at its core, ESG investment involves gauging a company’s long-term, rather than short-term, sustainability.
Here are some factors that ESG investors consider when making investments:
ESG investment practices spawned from the growing realization in the 1990s that accurately predicting a business’ success required the review and assessment of traditionally nonfinancial factors. The most notable statement of this acknowledgement came in 1998 when John Elkington published his work entitled Cannibals With Forks: The Triple Bottom Line of 21st Century Business. Elkington identified several nonfinancial factors that he argued should be included in assessing the long-term prospects of a business. Through identifying these factors, Elkington coined the term “triple bottom line” which refers to the financial, environmental, and social factors included in his proposed calculation. ESG can be viewed as a continuation and modernization of Elkington’s proposition, with the inclusion of the governance factor, which acknowledges that the manner in which a company is run will affect its bottom-line. For instance, the way a company treats its employees may affect employee morale and loyalty and, thus, its ability to retain talent.
Fast-forwarding to present day, there is general acceptance that financial assessments cannot be accurately made without access to ESG-related information. As such, ESG has become less a question of philanthropy or ethics and more a practical acceptance of the underlying relationship between corporate finance and society more generally. In recent decades, as investors increasingly seek ESG-related information for investment purposes, many governments around the world have implemented regulations and disclosure requirements relating to ESG factors. While the legal shift supporting ESG investment has been relatively slow-paced, international organizations such as the United Nations’ Principles for Responsible Investment have been actively promoting and supporting these legal developments.
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