Environmental, Social And Governance (ESG) Criteria

AAA

DEFINITION of 'Environmental, Social And Governance (ESG) Criteria'

A set of standards for a company’s operations that socially conscious investors use to screen investments. Environmental criteria looks at how a company performs as a steward of the natural environment. Social criteria examines how a company manages relationships with its employees, suppliers, customers and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits and internal controls, and shareholder rights. Investors who want to purchase securities that have been screened for ESG criteria can do so through socially responsible mutual funds and exchange-traded funds.

INVESTOPEDIA EXPLAINS 'Environmental, Social And Governance (ESG) Criteria'


Environmental criteria look at a company’s energy use, waste, pollution, natural resource conservation and animal treatment. They also evaluate which environmental risks might affect a company’s income and how the company is managing those risks. For example, a company might face environmental risks related to its ownership of contaminated land, an oil spill it was responsible for, its disposal of hazardous waste, its management of toxic emissions or its compliance with the government’s environmental regulations.
 
Social criteria look at the company’s business relationships. Does it work with suppliers that hold the same values that the company itself claims to hold? Does the company donate a percentage of its profits to the community or perform volunteer work? Do the company’s working conditions show a high regard for its employees’ health and safety? Are stakeholders’ interests taken into consideration?
 
With regard to governance, investors want to know that a company uses accurate and transparent accounting methods, and they want to see that common stockholders are allowed to vote on important issues. They also want companies to avoid conflicts of interest in their choice of board members. Finally, they prefer not to invest in companies that engage in illegal behavior or use political contributions to obtain favorable treatment.
 
What constitutes an acceptable set of ESG criteria is subjective, so investors will need to do the research to find investments that match their own values.
RELATED TERMS
  1. Sin Stock

    A stock of a company that is either involved in or associated ...
  2. Environmental Protection Agency ...

    The Environmental Protection Agency (EPA) was established in ...
  3. Environmental Economics

    An area of economics that studies the economic impact of environmental ...
  4. Business Ethics

    The study of proper business policies and practices regarding ...
  5. Production Externality

    Costs of production that must ultimately be paid by someone other ...
  6. Socially Responsible Investment ...

    An investment that is considered socially responsible because ...
RELATED FAQS
  1. Why has emphasis on corporate governance grown in the 21st century?

    Corporate governance refers to operational practices, management protocols, and other governing rules or principles by which ... Read Full Answer >>
  2. Why are business ethics important?

    Several factors play a role in the success of a company that are beyond the scope of financial statements alone. Organizational ... Read Full Answer >>
  3. What is socially responsible investing?

    In the financial world, where profit and return are often the priorities of the average investor, the vehicles we use to ... Read Full Answer >>
  4. How can I use the holding period return yield to determine whether or not I should ...

    Use the holding period return yield formula to determine whether the time is right to sell your bond. With this calculation, ... Read Full Answer >>
  5. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
  6. What percentage of a diversified portfolio should large cap stocks comprise?

    The percentage of a diversified investment portfolio that should consist of large-cap stocks depends on an individual investor's ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    Going Green With Exchange Traded Funds

    As investors become more environmentally conscious, the exchange traded fund market is following.
  2. Investing

    Clean Or Green Technology Investing

    Innovations in energy and consumption grow as companies adopt them to reduce costs.
  3. Mutual Funds & ETFs

    Evaluating Green Equity Investments

    Learn how to find stocks that are both eco-friendly and profitable.
  4. Personal Finance

    Go Green With Socially Responsible Investing

    Find out how morals and ethics can bring you a surprising return.
  5. Investing Basics

    Sinful Investing: Is It For You?

    Sin stocks may seen outright undesirable to some, but these "naughty" industries bring stable returns - even in hard times.
  6. Options & Futures

    Extreme Socially Responsible Investing

    Make your money work for you without putting it into ventures that don't support your values.
  7. Mutual Funds & ETFs

    Socially Responsible Mutual Funds

    It is possible to avoid unethical investments and still profit from mutual funds. Find out how!
  8. Mutual Funds & ETFs

    Socially Responsible Stocks: Do Good Deeds Punish Profits?

    Socially responsible investing doesn't mean accepting lower returns. Find out why squeaky-clean stocks shine as investments.
  9. Options & Futures

    Socially Responsible Investing Vs. Sin Stocks

    Can your principles make you richer or poorer? Find out if it pays pick your portfolio based on ethics.
  10. Investing

    The Number One Reason Why Most Traders Fail

    We show you the simple tools, availble to everyone, to succeed as an active trader: education, experience, charts, vision, and risk management systems.

You May Also Like

Hot Definitions
  1. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  2. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  3. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  4. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  5. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
  6. Touchline

    The highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!