What does ESG stand for?
Factors that may be relevant to investors
ESG investing encompasses a wide range of issues, from environmental concerns such as climate change and energy efficiency to social and governance issues, including gender and diversity, product safety, board composition, and executive compensation. Let’s take a look at each factor in closer detail:
Environmental factors look at how a company’s operations might affect the planet and environment and how the environment impacts the company, through issues such as water pollution or scarcity. As recognition of environmental risks such as climate change grow, consumers and regulators are increasingly penalizing polluters through purchasing choices or taxes.
Social factors include the relationship between a business and its employees, consumers, suppliers, and communities. Companies face growing regulation and the alienation of business partners, talent, and other stakeholders if they don’t nurture these relationships. Firms that manage their relationships with stakeholders well can build robust value chains while remaining at the forefront of social change.
Governance factors relate to the structures or systems put in place to make sure company management is effective. These can include the makeup and oversight of the board of directors, executive compensation, capital management, dividend pay-outs, and mergers and acquisitions. While companies may have to take on additional operational and disclosure-related costs as they engage in positive corporate behaviour, doing so can result in efficiency gains, greater trust from stakeholders, reduced corporate risk, and other long-term benefits.
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