Know more about ESG investing!
With growing consciousness about the impact created by businesses on the planet and people, more and more investors are now using a sustainability criterion along with other financial indicators for selecting companies for investments. Popularly known as ESG investing, this trend has led to an increasing number of companies making disclosures about their business practices.
Let us look at what aspects are looked at while assessing each of the ESG factors:
Environmental - Climate change, carbon emissions, air and water pollution, energy efficiency, waste management etc.
Social - Data protection and privacy, community relations, human rights, labour standards, etc.
Governance - Board composition, executive compensation, whistleblower schemes, bribery and corruption, etc.
A rating system is used to measure a company's exposure to long-term environmental, social, and governance risks. With a good ESG rating, companies can attract investors and tap into new sources of capital, thereby enhancing shareholder value. They can benchmark their performance to understand their strengths and weakness and enhance the risk management processes.
Evaluation of ESG factors can help investors in many ways. They can acquire a deeper understanding of the opportunities and threats that may surround the company before investing in it. Many investors believe that ESG factors could have a financial impact over a long-term time horizon, (for both fixed income as well as equity investments) and help improve the investment outcome in terms of return enhancement or risk reduction.