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Environmental Social Governance, what is ESG?

Environmental Social Governance, what is ESG? 



You've probably already come across the acronym ESG. If not, it's an acronym that refers to how companies across industries approach business.  Translated, the acronym stands for environmental and social stewardship.  It can be a way for you to learn significantly more about companies than they tell you about themselves on their websites or the packaging of the products you buy from them. There are whole specialist companies that monitor everything that, and especially how, companies do things. They then earn a rating for their "performance". It's their ESG score.

Elon Musk fights ESG rules

Recently, multi-billionaire and influential entrepreneur, Elon Musk himself has come to the media's attention. It just so happened that the electric car company he runs, Tesla, earned an unflattering ESG score. On Twitter, Musk was critical, noting that tobacco companies like Philip Morris have achieved higher ESG scores than Tesla, the pioneer in electric mobility. Tesla scored an ESG score of 37 out of 100, while Philip Morris scored 84.

Despite what Elon Musk thinks, the truth is that the criteria behind ESG scores don't just go on the surface.

If Tesla received a lower score than the cigarette maker, perhaps the way in which the minerals needed for the batteries necessary for EVs are mined or the fact that E-cigarettes are in some ways becoming more and more environmentally friendly to both production and human health are factored into the score.

ESG is not just an empty cliché

The fact is that about one in three dollars worldwide is invested in ESG-related assets, making ESG one of the biggest investment trends of our time. 

Investors are seeking ESG-related information from companies as a way to avoid risks and as a potential source of better long-term returns. 

ESG scores, also known as ESG ratings, give you access to deeper information about companies that is not typically considered in traditional financial analysis. 

Factors such as their exposure to climate change and human rights could have a significant impact on the performance of their business and show up in their share prices. 

If a company is well equipped to face the challenges of today's world and can be consistently responsible in how it uses resources (raw materials + human resources) it is much more likely to be resilient in the marketplace over the long term and therefore considered more sustainable.

ESG as a tool for resilience

As an investor, there are several ways you can choose to incorporate ESG scores into your investment decision-making process. ESG scores can provide that missing additional insight into a company beyond traditional financial analysis. As an investor, you can choose to invest only in companies that have high ESG scores and/or exclude companies with lower scores. 

ESG scores can also act as a monitoring tool. 

For example, a decrease in a company's ESG score can be a signal to examine what triggered the change.

 

A green score shows that a company is a leader in its sector in terms of ESG.

An amber score shows that a company is average in its sector in terms of ESG.

A red score shows that the company has a poor rating in terms of ESG compared to its sector.


Peter Svoreň, ApmeFX

 

 

 

 

 

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