What are ESG principles and why they are fundamental for the companies of the future

March 21, 2024

Elizabeth Smith

The acronym ESG refers to environmental, social and governance factors. These three categories are redefining the way people think about investing around the world. The phenomenon arises from the growing recognition of the financial impact that ESG issues can have on companies, in terms of cashflow, valuations, cost of capital and, ultimately, return on investments.

Table of Contents

What are ESG principles

At glance:

Environmental criteria examine how a company manages risks and opportunities related to environmental challenges. Considerations include carbon emissions, waste, deforestation impacts and dependencies, and biodiversity loss;

Social criteria focuses on how a company treats its key stakeholders, especially employees. Considerations include human capital management, diversity, equity and inclusion opportunities, the health and productivity of workspaces, and rules around unfair practices in selling products to customers;

Governance criteria examine how a company is governed, who makes decisions, and who is accountable for them. Considerations include executive compensation, tax practices and strategies, and board diversity and structure.

An “integrated” ESG approach involves considering the E, S and G factors that can directly influence a company’s long-term financial success.

How does ESG integration happen in practice?

Strategies that include ESG criteria encompass a variety of approaches that are often used in combination as part of the overall portfolio approach.

For actively managed portfolios, ESG integration can help investors maximize risk-adjusted returns. Some asset owners want to invest for a purpose beyond financial results.

For these clients, asset managers offer a range of ESG-focused strategies, which pursue an ESG objective alongside a financial one. These approaches include sustainable investing and impact investing.

ESG integration is becoming increasingly important, given the scale and scope of disruptive megatrends such as climate change or the rise of artificial intelligence. These challenges can represent highly relevant long-term financial risks and opportunities for investors’ portfolios.