Environmental, social, and governance (ESG) investing refers to a set of standards that socially conscious investors use to screen investments.

ESG stands for Environmental, Social, and Governance; investing in ESG simply means putting your money in companies that strive towards all three areas, making the world a better place one step at a time.

This strategy is a type of ethical investing method that allows people to make a choice about investing based on their personal values and principles.

What is ESG investing?

The acronym ESG refers to environmental, social, and governance standards that investors who are socially conscious prefer investing in. Another simpler way of explaining the phenomenon is through other terms used to describe it, such as “sustainable investing” or “socially responsible investing”. These investments are made considering the sustainability of the environment, the well-being of humankind, and the benefit and protection of the economy.

While the core principles of ESG investing have been around for years, today's prominence and awareness of social sustainability have only increased as investors are more concerned about the ethical prominence of the market. The aspects of ESG investing are non-financial; however, investors are taking note of including them within their schemes because of the ability to have growth opportunities as well as analyze potential material risks.

How does ESG investing work?

How ESG investing works is by identifying each aspect of a company and evaluating it based on the impact each provides.

• Environment: The first and foremost question one needs to ask is, ‘what kind of impact does a certain company have on the environment?’ This could mean anything from the company’s carbon footprint to their ability to mitigate toxic chemicals. It is important to figure out where the pursuit of sustainability falls in the supply chain.
• Social: Whether internally or externally, how does the company plan to improve its social impact? Social impact has been on the rise for the past couple of years and is exceptionally important within companies today. The inclusion of racial and cultural diversity in LGBTQ+ quality is a key factor in ensuring social awareness and impact.
• Governance: Lastly, the question to ask in terms of governance within a company is, ‘how do the company’s higher ups and management teams encourage and initiate positive change?’ Governance covers anything that relates to finance or leadership, whether that is issues including pay scales for executives or diversity in leadership.

Why is ESG important?

While ESG seems like it holds minor importance within the vastness of a company's list of priorities, it in fact addresses some of the most important aspects of the company. It scans a company for real-world, practical processes, addressing questions of how the company serves its community as a whole as well as its stakeholders like its employees, clients, shareholders, and the environment.

A company that can put in the effort to invest in ESG can bring about near perfect balance within their work, benefiting everyone while running the company with excellence.

Conclusion

Today’s real-world issues like climate change or sudden pandemics have truly shown the fragility of businesses and the economy. The fragility of business has in turn shown the importance and essentiality of resilience within an organization. Setting certain standards for ESG at a company can help build that resilience.