Among corporate strategies to deal with social, environmental and management crises associated with private capital, has been the call for ESG Investing. Several funds are springing up especially in the Global North that focus on placing money in projects that adhere to ESG principles. This brief gives an introductory overview of ESG investing.
ESG investing refers to an investment strategy where people put their money in companies that have policies and actions that make a positive net impact on the environment and society, and have good corporate governance. The acronym ESG stands for environmental, social and governance:
Environment.
This is about how a company manages its environmental impact, regarding adoption of clean energy solutions, reduction of carbon footprint, pollution, waste handling and attitude towards climate change for instance. This should also apply t its supply chain, as well as upstream and downstream impacts on the environment.
Social.
This is about how the company improves its social impact. This is also about how it treats the local community, pays workers, deal with minority groups and advocate for a better society.
Governance.
This is about management. This looks at how management and the board of directors address the interests of the company’s shareholders, regulators, employees, and customers.
ESG relies on independent research organizations to research on, monitor, score and even train companies for their performance in addressing these issues. ESG scores aim to provide objective, credible ratings of how well a company manages their environmental, social and governance policies.
ESG Funds
ESG funds are thematic mutual funds or exchange-traded funds that consider environmental, social, and governance factors in their investment strategies. ESG Funds employ various different strategies to incorporate ESG criteria when building their portfolios. Some use positive screening, actively seeking out companies with strong ESG performance. Others use negative screening to exclude companies involved in controversial activities such as tobacco, weapons, or fossil fuels.
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