Choosing an investment has traditionally involved predicting a security’s future financial returns. A growing trend toward socially responsible investing (SRI) indicates that many investors also consider an investment’s overall impact when assessing securities for investment.
ESG investing is one form of SRI, which is based on three major criteria used to evaluate companies for their social responsibility and consciousness. These include:
Environmental criteria that consider how a company performs as a steward of the natural environment. These include their energy use, waste, pollution, natural resource conservation, and animal treatment.
Social criteria that judge how a company manages relationships with its employees, suppliers, customers, and the communities in which it operates. These include the company’s values and actions, volunteer/charity work and the policies that support employees’ health and safety.
Governance criteria that consider a company’s leadership, executive pay, audits, internal controls, and shareholder rights. They assess whether a company is using accurate and transparent accounting methods, allowing shareholders to vote on important issues, avoiding conflicts of interest on their board, and avoiding engaging in illegal behaviors or using political contributions to obtain favorable treatment.
ESG represents a growing trend among investors. The Forum for Sustainable and Responsible Investing publishes a report on socially responsible investing strategies, and their 2020 US SIF Trends Report says that investing using ESG strategies grew 42% between 2018 and 2020.
If you’re interested in incorporating ESG investing into your investment strategy we would be happy to talk to you about that.