What Are Environmental, Social, and Governance (ESG) Criteria?
Environmental, Social, and Governance (ESG) criteria are a set of standards for a company’s operations. They set a performance benchmark, which may be used as selective investment criteria.
Environmental criteria consider how a company performs as a “steward of nature”. Awareness of and engagement with government targets for containing climate change should feature.
Social criteria examine how it manages relationships with all stakeholders including employees, suppliers, customers and the communities in which it operates. Diversity and inclusion feature in the task list.
Governance deals with a company’s corporate governance standards, including leadership, executive pay, audits, internal controls, transparency, visibility and communication with all stakeholders.
Environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation and treatment of animals. The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks.
Social criteria examine the company’s business relationships. Does it work with suppliers holding the same standards and values? Does the company donate a percentage of profits to the local community. Does the company encourage employees to perform volunteer work? Do the company’s working conditions show high regard for its employees’ health and safety? Are other stakeholders’ interests taken into account? A commitment to fair pay essential across the company and supplier network.
Governance, investors want to know that a company uses accurate and transparent accounting methods and that shareholders are given an opportunity to vote on important issues. They may also want assurances that companies avoid conflicts of interest in their choice of board members. They don't use political contributions to obtain unduly favourable treatment and don't engage in illegal practices. The "Seven Principles of Public Life", honesty, integrity, accountability, leadership, openness, selflessness and objectivity should also apply to those seeking to deliver good corporate governance.
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Sources Used in this article
Corporate Finance Institute : What is ESG?
Investopedia : What Are ESG Criteria?
UK government : The Seven Principles of Public Life