Environmental, Social And Governance (ESG) Criteria

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DEFINITION

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 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.



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