Several key considerations help determine whether an investor decides to support a particular company. While many factors can tip the scales, investors are increasingly seeking out businesses that uphold higher standards. Therefore, companies should openly communicate their standards to make it easier for investors to understand their values.
These standards are referred to as ESG, environmental, social and corporate governance criteria. These guidelines serve to identify companies that align with ESG criteria and enable investors to avoid companies that could present greater risk.
What Is ESG?
ESG refers to the framework investors use to evaluate the sustainability of companies. Younger people tend to be more interested in ESG than older investors. You may also hear ESG called sustainability investing or responsible investing because the idea is to choose companies that align with your ethos. There are three equally critical components of ESG:
- Environmental: How does the company treat the environment? Criteria that may be rated include waste pollution, treatment of animals and whether it conserves natural resources. Compliance with government regulations can also be an issue, and while an individual may be impressed with a principled stance, that could also open the company up to risk.
- Social: What types of social impact decisions does the company make? Considerations may include whether whether it maintains a diverse workforce or works with companies that hold similar values. It can alsomeasures how much the company donates to nonprofits or encourages employees to volunteer. In addition, a company’s health and safety record plays a significant role.
- Governance: How does the company govern itself? This may include whether stockholders get a say in critical issues and if the business employs transparent, accurate accounting methods. Criteria may may also consider how board members are chosen and the overall lawfulness of the company.
No company will be perfect across the board. Investors must learn to weigh the criteria based on their own values. That will guide them to make the best investment for their situation.
Why Is ESG Important?
The aim of investing is to find companies that will grow, thrive and generate an impressive return on investment. The higher the risk associated with a company, the less likely it will succeed in the long term. ESG can help identify companies in line for long-term success based on their social, environmental and corporate practices. Investors rely on ESG reporting to help them make fiscally responsible decisions with successful outcomes.
Who Provides ESG Risk Assessments?
TRC offers ESG risk assessments to help uncover potential pitfalls to investors. Your company can learn from and make decisions based on our ESG reporting, shoring up areas where you may fall short. Our team has years of experience in this area, and our expertise can help make your business stronger.
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