From Goodness Community

ESG stands for environmental social governance and is used to indicate the sustainability of a company or organisation. ESG investing means that you only invest in companies that score better on the environment, for example, biodiversity, carbon dioxide emissions or on social for example suitable employment, or on governance, for instance, the way a company is governed. Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities. ESG becomes more important and popular to use, however, ESG has no standard in disclosing ESG factors and information and there are no restrictions on how transparent a company has to be or that only a separate party can objectively decide the score of the ESG of a company. Because of this ESG is very potent for getting used by companies to greenwash or only used for the feelgood factor instead of making big changes in favour of the environment and global warming. ESG should get more restrictions and laws limiting the ways of reporting ESG and ways to use it as greenwashing so that ESG is transparent and trustworthy.

The 3 Factors of ESG

ESG is divided into 3 Factors: Environmental, Social and Governance.

The 'E' of ESG

Environmental is the most important one of the 3 because of the global warming crisis that is playing more and more an important role in our global society. Environmental is divided into different topics each contributing to climate change and global warming

The 'S' of ESG

Social factors refer to the relationship of an organization or company with its stakeholders. Examples of what companies or organizations are measured are Human Capital Management (HCM) for instance fair pay and employee engagement but also the impact of the company or organisation on the communities in which it operates.

The 'G' of ESG

Governance factors are about the way a company or organisation is led and managed. Factors that a company or organisation can be measured in are for instance how the leadership's incentives are aligned with stakeholders' expectations, how the leadership of a company or organisation views the right of stakeholders and honours the rights of stakeholders or how transparency and accountability is promoted in a company or organisation when it comes to the leadership of the company or organisation itself.

How to rate a company for ESG investment

To rate a company for ESG investment there are different options: Someone who wants to invest can look up ESG reports from a company itself or look at a stock market indicator like MSCI to look what companies are best for ESG investment or invest in a fund that does ESG investment and has ESG analyst look for the best companies to invest in.

ESG Stakeholders

ESG (Environmental, Social, and Governance) data is of interest to a variety of stakeholders, including:

  1. Investors and analysts, who use the data to evaluate the sustainability and social responsibility of companies and make investment decisions
  2. Companies themselves, who use the data to assess and improve their own ESG performance
  3. Regulators and policy makers, who use the data to develop regulations and policies related to sustainability and corporate responsibility
  4. Non-governmental organizations and advocacy groups, who use the data to hold companies accountable for their actions and advocate for change
  5. Consumers, who use the data to make informed decisions about the products and services they purchase
  6. Employees, who use the data to evaluate the values and culture of a company before joining or continuing to work there.

Pricing the E in ESG

To have the best effect of the E in ESG it should be priced. The amount of disruption of the environment caused by a company should be calculated to an amount of money that the company should pay or invest in other companies that restore what they disrupt. If the E in ESG is priced companies and products that are environmentally friendly are less expensive or have more profit. This would result in more urgency for environmental products or companies and innovation. Hydrogen cars and electric aeroplanes would already exist if environmental disruption by companies would be paid in money by the company itself because if that would be the case right now many large companies would not even have a profit because their disruption would be the same amount or even more than their profit.

The E in ESG and how it is used right now is far from perfect however it has a big potential for helping and stimulating the world in becoming more environmentally friendly.