ESG Investing

Investing in Environmentally Responsible Companies

From the environmental perspective, companies suitable for ESG investing must demonstrate that they have made substantial progress towards achieving their environmental goals in a variety of areas including:

• The use of renewable energy, such as solar and wind power
• Recycling and sustainable waste disposal
• Reducing emissions of greenhouse gases
• Implementing climate change policies
• Developing, producing and selling products based on environment-friendly technologies
• Providing environmental programmes for employees, such as cycling to work schemes

Analysts look for companies that produce reports using internationally recognised environmental standards such as Principles for Responsible Investment (PRI) and the Global Reporting Initiative (GRI).

Some companies, such as Unilever, produce their own sustainability reports, showing their commitment to and progress towards meeting ambitious environmental targets.

Investment in Socially Accountable Companies

From the social point of view, ESG analysts evaluate how a company treats its employees, customers, suppliers, local communities and society as a whole. Factors that are taken into account include:

• Inclusion and diversity within the hiring process
• Employees’ wages and staff turnover
• Sourcing raw materials ethically and responsibly
• Working conditions at suppliers’ factories
• Responsiveness to customers’ issues and complaints
• Product recalls
• Involvement with local charities
• Supporting projects that aim to reduce poverty or inequality on a global scale, such as Fair trade
• Taking a stand on social justice, human rights and other issues affecting society

Companies that meet social criteria may show how they are working towards achieving the United Nations’ 17 sustainable development goals.

Investment in Corporate Governance

The third aspect considered by ESG analysts is corporate governance. This relates to how the company is managed and is based on three pillars: accountability, security and transparency. Specific examples include:

• Inclusion and diversity when appointing directors and managers
• Executive compensation in line with the business’s results
• Whether large bonuses are given to directors when leaving the company
• Independence of the directors – if they are also directors of competing businesses, this can create conflicts of interest, for example.
• Transparent communication with shareholders
• Protecting customers’ personal information by preventing hacking, cyber attacks and other security breaches

Companies that do well in corporate governance are more likely to be trusted by outsiders, leading to a higher level of investment in the company.