By Robbie Karp
Investors increasingly use Environmental, Social and Governance (ESG) criteria to screen investments. Management, boards of directors, investors, customers, and employees often demand that companies not just make profits, but also be good corporate citizens.
Environmental criteria focus on a company’s operations, including how it uses natural resources and energy or manages waste. Environmental criteria also measure potentially material environmental risks to a company and how it manages those risks. Environmental initiatives can be industry and organization specific, and may require specialists to conduct materiality assessments and create formal action plans, often reported under internationally recognized standards (ISO).
Social criteria focus on a company’s relationships with its employees, the community, customers, suppliers, and other stakeholders. Issues may include: What are the company’s values and operating principles, and does it uphold them? Does the company engage with upstanding suppliers and hold these suppliers to its core standards? Is the company appropriately philanthropic? Does the company create cause programs to improve society, and if so, in what areas and with what kinds of organizations?
Governance focuses on a company’s leadership, transparency, executive pay and internal controls, employee policies, and shareholder rights — issues that revolve around legal standards and best practices.