ESG
Environmental, Social and Governance (Corporate)
ESG
What is ESG What is Environmental, Social and Corporate Governance (ESG)?
Short for “environmental, social and governance,” ESG represents a more stakeholder-centric approach to doing business. As ESG increasingly becomes top of mind for directors, it’s essential to consider the global nuances that drive focus region by region.
Companies that adhere to ESG standards agree to conduct themselves ethically in those three areas, and can draw on a range of ESG strategies, tactics and ESG solutions to do so.
But with such a wide range of possible approaches and solutions, and a panoply of issues that fall under the ESG umbrella, where should organizations focus? How should they make a start?
A good first step is to identify the issues fit into the umbrella categories of environmental, social and governance. Those can include:
Higher profitability: ESG companies with high ratings showed abnormal returns and were more competitive. This often led to higher profitability and dividend payments — especially when contrasted against low ESG companies.
Lower tail risk: High ESG rated companies experienced fewer idiosyncratic risk events like major drawdowns. Companies with low ESG ratings were more likely to experience these incidents.
Lower systematic risk: High ESG companies had less volatile earnings and less systematic volatility. They also had lower betas and lower costs of capital than low ESG rated companies.
ESG investing can also cut risk in emerging markets. There is research to suggest that companies adhering to ESG principles have a lower chance of tail risk — the risk of unlikely events that lead to catastrophic damage.ESG Sets a New Standard in Finance and Operations Principles
What once was seen as a less profitable, niche area of investing is moving to the forefront. The rise of green energy, the need to combat climate change, and growing public knowledge of the supply chain are all driving consumers to brands that adopt ESG finance and operations principles. And investors are following suit.
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