Environmental, Social And Governance (ESG) Criteria

What is the 'Environmental, Social And Governance (ESG) Criteria'

The Environmental, Social And Governance (ESG) Criteria is 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.

BREAKING DOWN '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. Social Impact Statement

    A company's account of how its operations affect social and environmental ...
  2. Domini 400 Social Index

    A market cap weighted stock index of 400 publicly traded companies ...
  3. Social Audit

    A formal review of a company's endeavors in social responsibility. ...
  4. Green Fund

    A mutual fund or other investment vehicle that will only invest ...
  5. Socially Responsible Investment ...

    Socially responsible investing looks for investments that are ...
  6. Social Responsibility

    The idea that a company should embrace its social responsibilities ...
Related Articles
  1. Your Practice

    Will ESG Investments Become a Staple of 401(k) Plans?

    Discover information on the rise and growing acceptance of ESG-based investing strategies and why they are becoming more commonly available in 401(k) plans.
  2. Personal Finance

    Go Green With Socially Responsible Investing

    Find out how morals and ethics can bring you a surprising return.
  3. Mutual Funds & ETFs

    Socially Responsible Mutual Funds

    It is possible to avoid unethical investments and still profit from mutual funds. Find out how!
  4. Investing

    How To Invest For The Greater Good

    We discuss why is important to prioritize economic, social and governance factors when making investment decisions, regardless of gender or generation.
  5. Mutual Funds & ETFs

    3 Socially Responsible ETFs to Consider in 2016 (DSI, KLD)

    Get an insight into three of the top-performing ETFs in 2016 that are available to investors in the category of socially responsible investing.
  6. Fundamental Analysis

    Ethical Investing: Environmentally-Conscious Investing

    By Amy Fontinelle Ethical investors who care about environmental issues want companies to minimize their negative impact on the environment. When choosing which companies to invest in, they ...
  7. Mutual Funds & ETFs

    Evaluating Green Equity Investments

    Learn how to find stocks that are both eco-friendly and profitable.
  8. Stock Analysis

    Five Stocks For The Socially Responsible Investor

    Making money in the market shouldn't prevent you from sleeping at night. Find out how to keep your conscience clean and bank account growing.
  9. Stock Analysis

    Four Socially Responsible Stocks To Watch

    Making money in the market shouldn't prevent you from sleeping at night. Find out how to keep your conscience clean and bank account growing.
  10. Investing

    Conscious Capitalism: Not Just for Hippies Anymore

    The dichotomy of do-gooder vs. profit-seeker may be at an end, according to proponents of the increasingly popular conscious capitalism movement.
RELATED FAQS
  1. What is a "socially responsible" mutual fund?

    As the name suggests, socially responsible mutual funds invest exclusively in socially responsible investments. Securities ... Read Answer >>
  2. How can a socially responsible investor gain exposure to the metals and mining sector?

    Read about social responsibility and the metals and mining sector, and how environmentally and culturally conscious investors ... Read Answer >>
  3. How do you craft an effective social responsibility policy?

    Craft social responsibility policies to brand the business, provide direction for the company's mission and motivate employees ... Read Answer >>
  4. How can a social responsibility consulting firm benefit a business?

    Learn about some of the ways that a socially responsible business consultant can help corporations and other businesses over ... Read Answer >>
  5. Why is social responsibility important in marketing?

    Drive consumers toward products and services by prioritizing social responsibility in marketing to enhance the company's ... Read Answer >>
  6. What are the top trends in corporate social responsibility?

    Learn about top trends in corporate social responsibility. Companies are increasing transparency, innovating, investing locally ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center