Definition of ESG
ESG stands for Environmental, Social, and Governance. These three factors measure the sustainability and societal impact of a company or business. They are used by investors and analysts to assess the ethical implications and potential future financial performance of investments.
Environmental: This factor assesses how a company’s operations impact the natural environment. It integrates elements like waste management strategies, practices for energy conservation, carbon footprint, preservation of natural resources, and the corporate reaction to climate change.
Social: The social dimension assesses how a company handles its interactions with employees, suppliers, customers, and the communities in which it conducts its operations. Aspects considered include worker’s rights and safety, community engagement, diversity, and customer satisfaction.
Governance: Governance pertains to the company’s leadership, internal controls, and shareholder rights. It assesses elements like board diversity, executive compensation, business ethics, transparency, and the level of shareholder influence.
Increasingly, companies are being evaluated not just on their financial performance but also on these ESG criteria. Many investors believe that companies that prioritize ESG issues are more likely to be resilient over the long term, manage risks more effectively, and deliver sustainable returns.