First, let me explain what ESG stands for – “Environmental, Social and Governance investing or ESG”. These three main areas are being used as significant factors in assessing the sustainability and ethical impact of an investment in a company or business. We are finding more investors believe that focusing on ESG principles can help deliver a superior, risk-adjusted performance over the long-term.
Once believed to be a fad, however, research has been offering a different story. In 2015, Deutsche Asset & Wealth Management and Hamburg University published an article titled ESG and Financial Performance: Aggregated Evidence from More Than 2,000 Empirical Studies. Their results showed a positive impact on ESG and corporate financial performance, and more importantly these findings appear to positively affect long-term stability over time.
Many believe this new focus, is due in part to the millennial generation who care about what their money supports and wish to invest in the way they live, by supporting companies that meet ESG criteria. I believe many of us, young and old hold a great concern for environmental standards, ethical practices, and transparency. These factors have become of paramount importance to us now and for future generations as we continue to favor companies that actively uphold the best practices on ESG issues. Here are some criteria used to determine ESG practices:
- Environmental factors – a company’s’ energy use, pollution, waste, animal treatment and natural resource conservation are evaluated to determine how environmental risks might affect a company’s income and how they are handling these risks responsibly.
- Social factors – a company that upholds high values and practices in its management of employees, suppliers, customers and their community. Such as, concern for their employee’s health and safety, a willingness to donate a percentage of profits back to the community and respect for their stakeholder’s interest.
- Governance – outstanding leadership, transparency in accounting, stockholders right to vote on important issues and no engagement in illegal behavior or use of political contributions to obtain special treatment.
Keep in mind these criteria are subjective, so as an investor you would need to do the research to find investments that match your personal values. Talk to your financial professional to see if incorporating ESG principles into your portfolio would benefit your future investments.
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