What is ESG?
“We empower the businesses we support, and in turn, their business practices.”
Jaliz Maldonado
ESG – Environmental, Social, and (Corporate) Governance – an investing term that is often used interchangeably with sustainable, ethical, or socially responsible investing (SRI).
Investing using ESG means investing for a future that is ultimately very green.
WHAT DOES ESG MEAN?
Environmental, Social, and Governance
Environmental
Measuring and reducing how an organization utilizes resources such as water and energy along with the waste discharged in both materials and carbon emissions on a day-to-day basis.
Social
Addressing the relationships between an organization, its people, the community, and its supply chain. This includes labor relations along with diversity and inclusion.
Governance
Based on business practices of screening against corruption, terrorist financing, and other crimes, to ensure serviced clients are ethical and comply with the laws in place.
THE ORIGIN STORY
THE EVOLUTION OF ESG
Religious Groups
Different religious group aimed to invest in businesses who kept certain specific values and abided by their laws.
Judaism requires the need for justice/equity in all aspects of life.
The Qur’an established guidelines aimed to prevent exploitation from the use of money.
In 1758, the Quakers prohibited its members from participating in the slave trade.
The Methodists screened investment opportunities to resist “sinful” companies, with business dealings in tobacco, firearms and alcohol.
Vietnam War Protests
Vietnam protestors boycotted weapon and chemical manufacturers, while student bodies demanded university endowment funds to no longer invest in defense contractors.
Meanwhile, the civil rights and labor movement raised awareness on social, environmental, and economic issues.
Environmental Disasters
In the wake of the Bhopal chemical accident, Chernobyl nuclear disaster, and Exxon Valdez spill, concerns about the environment and climate change led to the United States Sustainable Investment Forum (SIF).
The Domini Social Index
Designed to help socially conscious investors weigh social and environmental factors, the Domini Social Index was launched.
UN SDGs
In 2006, the United Nations established guidelines for investors incorporating ESG (environmental, social and governance) issues into investment practices.
WHAT IS ESG INVESTING?
THE RISE OF ESG INVESTING
Investor interest in ESG topics has rapidly increased in recent years due to not only the political climate, rising temperatures and water level, and the effects of COVID-19, but also their risk approach to financial and non-financial factors.
In other words, investors want to know how companies are making their profits and who it’s affecting.
ESG INVESTING
THE BASIC TYPES OF ESG FUNDS
Integration Fund
A fund that considers one or more ESG factors alongside non-ESG factors.
ESG-Focused Fund
A fund with a focus on one or more ESG factors.
Impact Fund
An ESG-focused fund that seeks to acheive a specific ESG goal or impact.
QUESTIONS TO ASK ESG INVESTMENT MANAGERS
ESG CHECKLIST
- Understand the overview of the Fund’s Strategy.
- Request information on their ESG Methodologies.
- Research their third-party data provider and ESG scoring provider.
- E.g. their ESG rating system
- Does their data provider comply with privacy and security laws?
- Look into how the Fund incorporates ESG factors in its investment decisions.
- How potential investments are evaluated, selected, and/or excluded.
- The percentage of companies being evaluated based on ESG criteria. If less than 100%, ask why.
- Inclusionary or exclusionary list
- Exceptions to their exclusionary list
- How Funds measure progress towards a specific impact
- KPIs related to Fund Analysis including time frames
- How the Fund engaged companies with ESG issues