Understanding ESG Criteria

Environmental, Social, and Governance (ESG) criteria are essential factors used to evaluate the sustainability and societal impact of an investment in a company or business. These criteria help investors screen potential investments based on corporate policies and to encourage companies to act responsibly.

Environmental Criteria

This aspect examines how a company performs as a steward of nature. It includes considerations such as energy use, waste, pollution, natural resource conservation, and treatment of animals. For instance, companies that actively reduce their carbon footprint and promote renewable energy sources are often viewed favorably.

Social Criteria

Social criteria look at the company’s business relationships. It evaluates how it manages relationships with employees, suppliers, customers, and the communities where it operates. Companies that promote diversity, equity, and inclusion, and those that engage in fair labor practices, tend to score higher in this area.

Governance Criteria

This involves a company’s leadership, executive pay, audits, internal controls, and shareholder rights. Investors want to ensure that a company uses accurate and transparent accounting methods and that its board of directors is accountable to shareholders.

In conclusion, understanding ESG criteria is crucial for investors who want to align their portfolios with their values and contribute to a sustainable future.