Environmental, social, and governance (ESG) is a term used to describe the three pillars of sustainable and responsible investing and/or practices that portray to the outside world, how 'sustainable' it is.

Mainly discussed in the investments & banking realm, ESG involves evaluating companies based on their performance and/or impact relative to the three headings and all encompassing areas found within each pillar.

The Environmental pillar of ESG focuses on a company's performance in protecting the environment and reducing its impact on the planet. This can include evaluating a company's greenhouse gas emissions, water and energy consumption, waste generation, and use of renewable energy. For example, if a company invests solely in companies in the fossil fuels industry, they would be scoring well below those that focus on renewables to say the least.

The Social pillar of ESG focuses on a company's performance in supporting social welfare and promoting social justice. This can include evaluating a company's policies on diversity and inclusion, human rights, and labor practices which would rank from parental leave, mental health supports and everything in between.

Lastly, the Governance pillar of ESG focuses on a company's performance in promoting good governance and transparency. This can include evaluating a company's board of directors, executive compensation, and management practices - as with all companies, and now with the proliferation of the BCORP movement, good governance and data practices are paramount to the success of the sustainability movement. Having spent 6 years working in the corporate world across Banking, Health and Government projects - without good data and governance, little good can be achieved in general.

When it comes to investments and returns, ESG investing is continuing to grow in popularity. Rather than the usual investor and/or company focusing on ROI (Return on Investment), a new lens is changing the view to SROI (Sustainable Return on Investment), whereby we would put a value on promoting and ranking other metrics financial and non-financial. For example, did this investment help benefit the land, the ozone layer, or reduce an environmental risk for the surrounding area - all things which are hard to put a number on, but are clearly beneficial to the world and should be, the investor.

The pros and cons of the ESG movement;
  1. Long-term sustainability: ESG investing focuses on companies that are sustainable and responsible in their operations, which can support long-term growth and stability. This can help to protect the environment, support social welfare, and promote good governance, which can benefit investors and society as a whole.
  2. Positive social and environmental impact: ESG investing can support companies that are working to address social and environmental challenges, such as climate change, inequality, and poverty. This can have a positive impact on society and the environment, and it can also generate positive financial returns for investors.
  3. Risk reduction: ESG investing can help to reduce the risk of investing in companies that are unsustainable or unethical, which can protect investors from potential losses. For example, investing in companies that are exposed to environmental risks, such as climate change, can be risky, but ESG investing can help to reduce that risk.
  1. Limited investment options: ESG investing may have limited investment options, as not all companies meet the criteria for ESG investing. This can make it difficult for investors to diversify their portfolios and access certain markets or sectors.
  2. Potential performance trade-offs: ESG investing may involve trade-offs in terms of performance, as some companies that meet ESG criteria may not have the same growth potential as other companies. This can make it challenging for investors to balance their desire for positive impact with their desire for financial returns.
  3. Lack of standardization: ES
Written by Cathal O Reilly

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