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What is ESG? Environmental, Social, and Governance Explained

The concept of sustainability has become very important over the last decade or so. Companies have realized that they cannot ignore their impact on the environment, the economy, and society. So, are you interested in investing in companies that care about their impact on society? Or maybe you want to invest in companies that take environmental responsibility into account? If so, then you should read this article from Curt Ranta.

1. What is ESG?

ESG stands for environmental, social, and governance. It is about taking a holistic view of investing and how companies operate and behave. In recent years, many investors have become increasingly interested in ESG factors. In its simplest terms, ESG means considering how a company operates, not just what it makes. It includes where a company gets its power, which it employs, how it treats any community it works in, and how it treats its employees.

  • Environmental Sustainability

Environmental sustainability describes how we manage our environment to sustain its natural state and function without degrading it beyond a point where it no longer supports the human activity. In short, environmental sustainability means doing what’s best for the planet.

  • Social Responsibility

Social responsibility is about making sure everyone involved in the production and consumption of a product or service is treated fairly and equitably. It’s about being conscious of our impact on others and taking steps to minimize negative consequences.

  • Governance

Governance is any system of rules, laws, regulations, policies, procedures, etc., that govern a company, organization, community, or society. In short, governance ensures that the people responsible for running things do so responsibly.

2. Why Does ESG matter?

Because people want to invest their money in something they believe in. When they do, they often look beyond the financial statements to ensure the company they’re investing in is doing good while making a profit.

Companies that practice good corporate behavior tend to outperform those with poor ethics. So it’s no surprise that investors are turning to ESG analysis to ensure they’re getting the best return for their investment dollars. 

Investors are increasingly interested in understanding the implications of these issues for corporate performance. ESG investing aims to improve long-term financial returns through sustainable investments.

  • Companies With Strong ESG Ratings Tend to Outperform Those Without Them

The Economist Intelligence Unit (EIU) recently completed its first global survey of companies’ environmental, social, and governance (ESG) performance across four sectors—finance, healthcare, consumer goods, and utilities. 

They asked each company to survey how well they perform on these three dimensions and whether their financial performance was affected by factors beyond their control. Their research reveals some striking findings.

  • Firms with strong ratings have higher market values than their peers with weaker ratings. These results suggest that investors should consider companies with strong ESG scores when evaluating potential investments.
  • The relationship between ESG rating and company performance is strongest in the healthcare sector. Companies in this sector with strong ESG ratings have outperformed their counterparts with weak ratings by nearly 10% per annum since 2010.
  • More than half of the respondents said they had not taken any steps to improve their performance on any of the three dimensions since 2012. This suggests that many companies have yet to learn that taking action to improve their ESG score does not necessarily lead to lower earnings.
  • Finally, They found that most ESG-related costs arise from external activities rather than internal ones. External costs—including regulations, standards, and taxes—are estimated to account for 70% of total ESG expenditures. Internal expenses—including compliance efforts, training, and awareness campaigns—account only for 30%.

Investors who engage in ESG investing tend to focus on the long-term sustainability of a company rather than its short-term profitability. They look at the company’s environmental record, human rights policies, community relations, and other aspects of its operations. Below Curt has outlined some ways ESG operates:

  • Corporate Citizenship

Corporate citizenship is about acting ethically and socially responsibly while still making money. It’s about treating employees well and giving back to the communities where companies operate.

  • Risk Management

Risk management is about mitigating the risks associated with something (whether it is business, personal, or otherwise). It involves identifying potential risks and developing strategies to mitigate them.

  • Transparency

Transparency provides information to stakeholders and the public to make informed decisions. It’s about sharing data and facts to help foster trust and understanding.

  • Responsible Investment

Responsible investment is about investing in businesses that align with values that matter to investors. It’s about putting money into companies that treat their workers, customers, suppliers, shareholders, and the environment well.

Conclusion

In summary, ESG investing is becoming increasingly popular among institutional investors, who see it as a way to add value to their portfolios by ensuring that they invest responsibly. Curt Ranta says that investing in companies with strong environmental, social, and governance practices is a great thing to do for your portfolio, and it could also benefit the world.

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