What is ESG and how is it applied in Finance?
ESG as an abbreviation stands for Environmental, social, and governance (ESG) criteria. These criteria are a set of standards for a company’s operations that are used to screen potential investments and initiatives.
Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees and the communities where it operates. Governance deals with a company’s leadership.
In finance ESG criteria are used to create sustainable outcomes that drive value and fuel growth, while strengthening the environment and societies.
The practical application of ESG principles means including non-financial factors as part of the investmentprocess to identify material risks and growth opportunities.
Such criteria generally exclude investment targets which do not adhere to the guiding principles of ESG philosophy and include those elements which do support ESG principles.
On the product level, ESG investing excludes those elements which are deemed harmful to people and the environment. Unsurprisingly, projects appearing on that list are those related to activities involving armaments, tobacco, alcohol, nuclear energy, as well as oil and coal production. An ESG approach will also avoid any activities connected to the violation of human rights and high-level corruption.
On ESG inclusion side, we often find sustainability-themed investments such as clean energy projects. Examples of such investment include those supporting wind and solar power generation and companies that develop clean water initiatives.
ESG investing may also be thematic in nature such as those measures which promote gender equality.
