Sometimes referred to as “sustainable investing” or “ethical investing”, ESG (environmental, social and corporate governance) investing is an umbrella term for those investments that, in addition to aiming for positive returns, seek to have a positive and sustainable impact on the environment, society and business performance. ESG investors, therefore, will usually evaluate a company by incorporating ESG criteria into their research when screening for potential investments and assessing potential risks. But there’s not just a hope among investors that the more benevolent companies will perform well; on the contrary, a solid rationale for ESG investing exists—that companies that comply with high standards of environmental, social and governance standards should outperform in the long-run.
As far as environmental factors are concerned, such criteria will normally include evidence that the company effectively manages the overall impact from pollution, carbon emissions, climate impact, resource depletion and deforestation. Social factors, meanwhile, are concerned with how the company treats people with regards to fairness, diversity and equality in employment decisions, as well as working conditions, corporate social responsibility, and health and safety. Finally, governance factors relate to the company’s governance policies, such as tax strategy, executive remuneration, political lobbying, previous corruption issues, and board diversity and structure.
Overall, ESG has become deeply associated with investment strategies that choose sustainability factors as a way to identify companies with superior long-term business models. According to Anders Thorendal, who has been the national asset manager for the Church of Sweden since 2005 and who spoke to Forbes in August 2017, sustainability is about “identifying well managed companies that have a long-term view…and where sustainability aspects are part of their business model even though it is not necessarily expressed as sustainability”. Thorendal references the conclusions reached by Professor Robert Eccles at Harvard that such companies are more profitable over time and deliver better returns to their shareholders. A sustainability-based approach, according to Thorendal, means that a company has sufficiently identified and dealt with the risks associated with its operations.