ESG Investing

"ESG" stands for environmental, social, and (corporate) governance. ESG investors examine criteria within these three categories to identify companies that perform well using ESG-related metrics. Combining the ESG lens with more traditional stock analysis techniques is known as ESG integration. Anyone can join the swelling ranks of ESG investors by simply learning more about ESG and then using the framework to make future investing decisions.

The environmental component encompasses a company's impact on the planet in both positive and negative ways. A company that's an actively good steward for the environment might be more deserving of your dollars than one that is not.

Environmental aspects of a company to research and analyze include:

E - is for environmental

  • Climate change policies, plans, and disclosures.
  • Greenhouse gas emissions goals and transparency about how the company is meeting those goals.
  • Carbon footprint and carbon intensity (pollution and emissions).
  • Water-related issues and goals, such as usage, conservation, overfishing, and waste disposal.
  • Usage of renewable energy, including wind and solar.
  • Recycling and safe disposal practices.
  • Green products, technologies, and infrastructure.
  • Environmental benefits for employees, such as bicycle commuting rewards programs and environmentally based incentives.
  • Relationship and past history, if any, with the U.S. Environmental Protection Agency (EPA) and other environmental regulatory bodies.

Note how the word "goal" is sprinkled throughout the above bullet points. While goals are nice, concrete numbers and metrics that demonstrate real progress are much better.

For those details, locate sustainability reports prepared using respected sustainability standards, such as those established by the Global Reporting Initiative (GRI) and the United Nations Principles for Responsible Investment (PRI). Corporate websites with sustainability pages can be useful for budding ESG investors, but be wary when they don't contain enough detail to paint a complete picture. For example, we can appreciate companies that demonstrate a commitment to recycling, but that alone would not merit recognition for being environmentally responsible.

S - is for social

The social component of ESG consists of people-related elements, like company culture and issues that impact employees, customers, consumers, suppliers, the local community, and society at large.

For information on a company's social performance, ESG investors should look to sustainability reports that use a respected standard like the GRI or PRI framework, which each go beyond environmental issues to include information pertinent to employees, suppliers, and the community.

Socially minded investors can also keep up with respected lists and annual rankings, including Fortune's Best Companies to Work For and Forbes' Just 100. Media reports on how companies treat their employees and the companies' lobbying efforts for or against social justice issues are also relevant. Another good way to gauge how a company and its management is received by its workers is to read employee reviews on websites such as Glassdoor.com.

Social aspects of a company to research and analyze include:

  • Employee treatment, pay, benefits, and perks.
  • Employee engagement and staff turnover/churn.
  • Employee training and development.
  • Employee safety policies, including those related to sexual harassment prevention.
  • Diversity and inclusion in hiring and in awarding advancement opportunities and raises.
  • Ethical supply chain sourcing, such as conflict-free minerals and responsibly sourced food and coffee.
  • Mission or higher purpose (or lack thereof).
  • Customer service friendliness and responsiveness.
  • Performance history for consumer protection issues, including lawsuits, recalls, and regulatory penalties.
  • Public stance on social justice issues, as well as lobbying efforts.

G - is for corporate governance

The corporate governance component relates to the strength of the board of directors and company oversight, as well as how shareholder-friendly versus management-centric the company is. In less dry terms, a company with good corporate governance and a strong board of directors relates well to different stakeholders, runs its business effectively, and aligns the management team's incentives with the company's success.

Corporate governance issues come to the fore every year during proxy season, when most companies file their proxy statements, which announce annual meetings, define the issues to be voted on, and provide relevant supporting information. These documents routinely cover a variety of corporate governance topics. Shareholders can vote by proxy (without actually attending the annual meeting) on a variety of issues, such as executive compensation ("say-on-pay"), director appointments, and shareholder proposals.

Governance aspects of companies to research and analyze include:

  • Executive compensation, bonuses, and perks, including whether executives receive large bonuses when they leave the company.
  • Compensation tied to metrics that drive long-term business value.
  • Diversity of the board of directors and management team.
  • Potential for conflicts of interest for the board of directors based on the directors' independence and whether they hold other board seats.
  • Proxy access, meaning shareholders' ability to put forth board of director candidates.
  • Whether a company has a classified board of directors, which denotes whether term lengths among board members differ.
  • Whether the company's chairman and CEO roles are separate.
  • Whether board votes are decided based on majority voting (winner receives more than half the votes) or plurality voting (winner receives the most votes).
  • Whether the company issues dual- or multiple-class stock.
  • Transparency of communication with shareholders.
  • The nature and outcome of lawsuits brought by shareholders.
  • Relationship and history with the U.S. Securities and Exchange Commission (SEC) and other regulatory bodies.

Many corporate governance details are found in sustainability reports, but interested investors should also read the annual proxy statements they receive from the companies in which they own shares. To research corporate governance attributes (including interesting tidbits such as CEO pay) before buying a stock, you can access proxy statements on the SEC's website by searching for the filing type DEF 14A.


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