Understanding Environmental, Social and Governance (ESG) 

In the modern business world, investors seeking to back commercial enterprises may base their decisions on more than simple profitability and growth potential. There are many evolving and dynamic factors for investors to consider as they weigh how to spend their funds and build their investment portfolios, including criteria that may help represent a company’s commitment to ethics and responsibility. With this in mind, understanding ESG investing is a crucial step for businesses and investors alike.

What Is ESG Investing?

ESG investing (Environmental, social, and governance), also known as sustainable investing and socially responsible investing, refers to a company’s scores regarding its perceived levels of responsibility and ethical behavior. ESG stands for environmental, social and governance, three categories by which investors and firms may measure a business’s practices, policies and past actions. At their core, these criteria focus on grading organizations based on how they protect or positively contribute to the environment, local communities and employees while also adhering to relevant regulations and standards.

How Does ESG Investing Work?

When investors consider how they wish to allocate their funds, they may often prioritize associating themselves with companies with which their values align. In the case of ESG investing, potential investors could prioritize the following types of behaviors or values:

• Environmental—Investors may ask themselves how a business impacts the natural world around it. For example, they may look into how willing a company is to use toxic chemicals or pollute amid business practices or, conversely, their commitment toward ethical treatment of animals or minimizing greenhouse gases.
• Social—A company’s organizational culture, including relationships within the workplace and contributions throughout its community, may also be considered by investors. This could refer to social factors, such as diversity and equality initiatives, as well as philanthropic and charitable efforts, such as organizing employee volunteer programs and local food drives.
• Governance—Investor perception regarding these criteria may often be shaped by a business’s directors and officers, and the decisions they make. For instance, companies that commit to transparency and accountability make responsible choices regarding board members and leaders and avoid conflicts of interest or scandals may be seen as more attractive investments.

How Are ESG Scores Determined?

As investors seek information on various opportunities, they may employ the services of ESG research firms. These firms gather and maintain information on companies, and while the exact scoring criteria can vary, the following factors may be considered:

• Annual reports
• Corporate sustainability measures
• Board structure
• Resource management practices
• Workplace culture
• Employee compensation

In general, firms typically grade ESG scores on a 100-point scale, with a higher score indicating a better performance in certain areas.

We’re Here to Help

The knowledgeable and experienced team at Lyceum Insurance Services is dedicated to helping clients achieve a comprehensive understanding of ESG investing. Visit our website or call 301-840-6624 to learn more.

This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.