Updated: Sep 27, 2020
There has been a great deal of attention given to MSG (Monosodium Glutamate) and whether it is a harmful food additive. If as much attention was given to ESG we might well be further along in our battle against climate change.
ESG stands for Environmental, Social and Governance which have become “the three central factors in measuring the sustainability and societal impact of an investment in a company or business”. That sounds important, right? The question is, why, and is it important to you personally?
If you are investing in the stock market or have a retirement fund to care for, like I do, you will probably agree with me. It's a world of acronyms and layered subsidiaries. All I know is that ‘someone’ has my money, is making making more money with it and is giving me some back. Beyond that, who is using all this money and for what, I hardly have a clue. Case in point: How can I tell if my money is being used to destroy the environment or to save it? It’s damn near impossible. Enter ESG.
The history of Socially Responsible Investing (SRI) is fascinating. My focus in this article is an element that has evolved from that history known as ESG "which strives to assess the materiality of non-traditional data to determine which companies are best prepared to compete in a world with dwindling natural resources, higher regulatory burdens, a growing human population and climate change".(Bailard Wealth Management) These are the three areas of measurement:
Environmental – Climate Change and sustainability
Social – Diversity, Human Rights, Consumer Protection, Animal Welfare
Governance – Managerial Structure, Employee Relations, Executive Compensation, Employee Compensation
Over the past couple of decades, with a push from Secretary General Kofi Annan of the United Nations, ESG has become a measuring device of choice for investors who want to hook up with sustainable companies. The actual mechanics of this measurement are a bit complex as one might imagine. Even then, ESG is not perfect, but a good place to start. The fact that there are few other ways for individual investors, makes it a great place to start. Coupled with the growing strength of green energy companies and renewable stocks this is becoming a no-brainer. It’s a massive shift of money from environmentally unfriendly stocks to eco-friendly investments.
“Private equity funds are also participating in the trend as institutional investors continue to commit themselves to ESG principles. And with the vast majority of millennials interested in sustainable investing, ESG’s influence on capital access is here to stay. Ignoring ESG-focused capital sources would be unwise and unnecessarily hamper the industry’s recovery.”(Winston and Strawn speaking about the oil industry.)