How genuine is the Environmental, Social, and Governance Criteria?
What are ESG criteria?
Investors have different preferences. Some prefer investments from socially conscious companies, while some do not care much about other factors. Their top priority is profitability. Of course, gaining profits is an important goal for every investor. However, if the investor is one of the first types we mentioned, they would not consider an investment from a company that does not consider the ESG criteria even when it can generate huge profits.
ESG stands for environmental, social, and governance. This criterion is a standard that a company follows for its operations. Socially conscious investors do not take this lightly. They constantly check this whenever they look for potential investors. We see that these criteria are composed of three things:
- We have the environmental criteria, which focuses on how a company works for nature.
- We have the social criteria that assess the company’s relationship with the people that surrounds it. This includes its employees, customers, suppliers, and the communities where it is located.
- Governance is about company leadership that comes with audits, executive pay, shareholder rights, internal control, and the like.
Different investors, investments, companies, and the ESG criteria
You may have noticed that many brokers and mutual fund companies started to offer ETFs and other products that follow the ESG criteria. Why? It’s because more and more people, especially the younger generation, would instead put their money in investments that help society and the environment be better than those that do not. Because of technology, we even have Robo-advisors that use these kinds of investments to attract potential investors.
Everyone is guilty of the Earth’s deterioration. Humans are the main perpetrators of global warming and climate change. So, it is only suitable for us to do something about it in one way or another. Investors who have an awareness of the environmental problems help by resorting to ESG investing. Other people refer to it as impact investing, responsible investing, sustainable investing, or socially responsible investing. They are now more meticulous about their investments and the behaviors of the affiliated companies. On the other hand, companies and firms help by following the ESG criteria. Brokers and mutual fund companies help by offering them. In fact, ESG investments skyrocketed in 2020.
Ups and downs of the ESG criteria
If ESG is helpful to the environment, then why do we say that it has downsides? Socially responsible investments are known to require trade-offs from investors. A limit was placed for the universe of companies accepted for investment. Aside from that, the investors’ potential profit was limited. Some companies that are not so good even performed well if we talk about the stock price.
Some investors are also concerned that the ESG criteria have another purpose aside from ethical concerns. Some believe that one can avoid companies with practices that can signal risk factors if the ESG criteria are followed.
Also, a business that practices the ESG criteria can have more traction. Investments firms track how they perform. Many financial services companies announced their annual reports. These extensively review their ESG plans and results.