What is ESG Investing?
Investors around the world utilize differing philosophies and analysis strategies to make responsible investment decisions. One of the emerging philosophies gaining traction in recent years is that of “ESG investing”, which stands for Environmental, Social, and Governance. Eduardo Gonzalez, a New York City-based financial services professional and ESG investing expert, knows that much confusion surrounds this area of responsible investment strategies. In this guide, we will explore ESG investing, including an overview of the analytic criteria investors can use to make future investment decisions, says Eduardo Gonzalez from Hoboken, NJ.
ESG Investing: Responsible Analysis for Investments
As stated, ESG is an acronym for Environmental, Social, and Governance investing. Investors traditionally identify investment opportunities based on stringent criteria, including stock performance, corporate histories, and market penetration or new products or services being rolled out. With ESG investing, investors analyze factors related to the investment’s responsible and sustainable practices.
The environment has been a hot-button issue for the past two decades. Investors keen to support businesses who demonstrate good stewardship of the environment have many options, but these options require careful consideration. Environmental factors to be analyzed include:
- A given company’s climate change policies and plans.
- A company’s carbon footprint and/or policies on reducing that footprint.
- Environmental-based incentives for employees of a given firm.
- Adoption of renewable energy sources in business operations.
- Products and technologies that are green, sustainable, or low-impact from an environmental perspective
- Companies’ relationships with environmental regulatory agencies like the EPA
Social components in investing have recently become a dominant factor in responsible investing. More and more investors are favoring those companies that meet certain criteria, such as sustainability standards set by the Global Reporting Initiative (GRI) and the Principles for Responsible Investment (PRI). Social factors to analyze include:
- Employee diversity and inclusion in hiring and promotion practices.
- Ethical sourcing within company supply chains.
- Public policies on social justice and history of lobbying for or supporting social justice issues.
- Favorable employee recruitment and retention rates.
- Employee benefits programs, particularly in quality benefits and perks.
- Training practices, including employee training on sexual harassment and discrimination in the workplace.
Governance is the area where many investors have the most difficulty in analyzing potential investment opportunities. Corporate governance, or how a business operates in an ethical and responsible manner, has become more important in recent years due to ever more stringent regulation. To research a potential investment’s governance, investors should analyze:
- Compensation related to achieving long-term goals.
- Voting practices for boards and directors.
- Stock structures.
- Diversity of management and leadership teams.
- Relationships and histories with regulatory organizations like the Securities and Exchange Commission (SEC).
- Transparency in communication with a company’s shareholders, including any history of litigation brought by shareholders.
Investment Strategies using ESG Criteria
Once investors identify key areas of environmental, social, and governance practices, they can begin to eliminate the potential investments that do not fit their criteria. This is not the only investment option, however; many ESG investors buy shares in companies that do not meet certain criteria or that may be unpalatable as a means of spurring improvement in ESG practices. Shareholder investors have tremendous leverage when it comes to encouraging or demanding that companies update their business practices to reflect responsible behavior.
Investors may also choose to exclude entire classes of companies, such as defense contractors, fossil fuel energy producers, or companies with histories of less-than-sustainable business practices. By focusing on those companies that embody positive ESG principles, investors may gain stability over the long-term, ultimately reducing risks while enjoying the knowledge they are supporting sustainable, responsible business interests.
For more information about ESG investing, visit the biographical site of Hoboken’s Eduardo Gonzalez