Environmental, Social and Governance (ESG)

ESG investing considers factors beyond traditional financial measures. Environmental factors include climate change, carbon emissions, pollution, resource use and waste. Social factors include treatment of employees, labour standards, customer safety, data privacy and community relations. Governance factors include board independence, executive pay, shareholder rights, transparency and business ethics.

Investors use ESG information in different ways. Some exclude certain industries, such as tobacco or weapons. Some favour companies with strong ESG ratings. Others integrate ESG risks into their financial analysis, arguing that poor environmental or governance practices can lead to lawsuits, fines, reputational damage and lower long-term returns. Some engage with companies to encourage better practices.

For example, an investor might reduce holdings in a company with poor safety records or weak board oversight, viewing these as risks to future profits.

ESG investing has grown rapidly but faces criticism. Ratings from different providers often disagree, data can be inconsistent and some funds have been accused of greenwashing, exaggerating their ESG credentials. There is also ongoing debate about whether ESG approaches improve, reduce or have little effect on returns.