Understanding the E, S and G of Sustainable Investing
Individuals, governments and societies want corporations to behave in more ethical and sustainable ways. Because government and local authorities are forcing companies to take responsibility for their unethical and unsustainable actions, the tradeoff between profits and sustainability is disappearing. In fact, companies with unethical and unsustainable business practices are at an increased risk of significant profit declines. The three broadest categories by which companies are judged are environmental, social and governance. Collectively, they’re referred to as ESG. The environmental category addresses natural resource usage and the environmental impact of running a business. The social category addresses human rights within a company, within partner companies and for society at large. The governance category addresses the behavior of and compensation for the leaders of companies.
E – Environmental
This is perhaps the easiest of the concepts to understand. Companies are judged by the impact of their business on pollution, ecosystems, biodiversity and natural resource supplies, which includes energy efficiency, waste management and water usage. Given the global concerns for climate change, companies engaged in fossil fuel (coal, oil and gas) extraction are highly scrutinized. Other examples of products or practices that impact the environment are nuclear power waste, pesticides, deforestation and mining. In general, investors and society expect companies to improve the way they deal with environmental challenges, take more responsibility for their environmental impact and develop and utilize environmentally friendly technologies.
S – Social
The social category refers to companies’ impact on society, both internally and externally. Internally best practices address diversity, inclusion, fair pay and labor standards, which are all considered human rights. Diversity means having a workforce that includes members of multiple ages, races, religious backgrounds, sexual orientations, nationalities, etc. Inclusion addresses the ability of individuals to be themselves and includes such things as places for breastfeeding mothers to pump breast milk, places for Muslims to pray and the acceptance of multiple languages being spoken in common areas. Labor standards include the right to collective bargaining, the absence of forced labor or child labor and nondiscriminatory labor practices. Not only should companies ensure their workers are being treated fairly, they should also ensure that workers at partner companies, such as suppliers, are being treated fairly. Externally best practices address community relations and involvement, as well as product safety and reliability.
G – Governance
Governance refers to issues related to company leadership. Best practices address corporate board diversity and inclusion, executive pay, succession planning and shareholder rights. For example, it’s becoming more and more common for shareholders to vote against executive pay packages. Best practices also address corruption and bribery, compliance with laws and regulations and lobbying practices. Many companies lobby governments and representatives in order to stop laws and regulation that would require them to improve their ESG practices.
|Environmental Factors||Social Factors||Governance Factors|
|Pollution and waste management||Labor diversity and inclusion||Board diversity and inclusion|
|Natural resource usage||Employee pay||Executive pay|
|Impact on Climate Change||Supplier standards||Succession planning|
|Energy efficiency||Community relations||Shareholder rights|
|Environmentally friendly technologies||Product safety||Corporate ethics|
The United Nations (UN), the Organization for Economic Cooperation and Development (OECD) and the International Labour Organization (ILO) provide ESG guidelines and additional resources.
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