Environmental, Social and Governance (ESG), also often known as Environmental, Social and Corporate Governance, indicates a set of standards used to evaluate a company’s performance on these three non-financial metrics. Investors take note of these factors to identify investment opportunities, material risks and growth prospects in the market.
The act of investing using the ESG criteria to raise competitive financial gains while also reflecting a positive effect on society is known as ‘Sustainable Investing’ or ‘ESG Investing’.
ESG investing began in the 1960s, where investors altered their portfolios to exclude industries or stocks that were involved in activities such as tobacco manufacturing, the South African apartheid regime, etc.
What Is ESG Evaluation?
ESG Evaluation is a qualitative, data-driven and forward-looking assessment of a company’s ESG performance. It also evaluates the company’s preparedness for future risks and opportunities.
The ESG score, however, only measures the verifiable reported data released by the company in the public domain. Information that is not available publicly cannot be assessed and doing so may indicate ESG controversies.
ESG Controversy & Its impact
An activity that is undesired or unintentional, leaving a negative impact on the environment and society and exposing the company’s reputation, can be termed as an ESG controversy. Such events can halt the rise in the company’s stock performance and hamper its image.
Why Is ESG Gaining Importance?
As a result of more than 2,000 studies, companies paying attention to ESG concerns have shown 63 per cent of positive results on equity return, as per a report published by McKinsey.
For instance, FedEx reportedly aims to convert its entire fleet to electric or hybrid engines. In 2016, 20 per cent of FedEx’s vehicles were converted to green engines, which helped reduce the fuel consumption by more than 50 million gallons, as per reports.
Also, studies have shown that there is a positive correlation between job satisfaction and positive social impact.
Conscious Capitalism & ESG
Conscious Capitalism is a philosophy created by marketing professor Raj Sisodia and Whole Foods co-founder John Mackey.
The main idea behind Conscious Capitalism is that businesses should operate ethically while aiming at high profits. The aim is to serve all the five stakeholders of the company, namely, the shareholders, management, employees, humanity and environment.
The four principles that guide Conscious Capitalism are as follows:
Companies practicing conscious capitalism and its principles are the ones with high ESG scores and attracting high ESG investments.
Companies Must Ask Themselves:
In the “Dear CEO” letter in 2018, BlackRock Chairperson and Chief Executive Officer Larry Fink had urged companies to ask themselves the following questions to evaluate their ESG metrics.
ESG & Cryptocurrencies
Cryptocurrency is a digital currency where transactions are recorded by a decentralized system.