What Is ESG And How Does It Work – 2021 Guide

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ESG represents criteria related to environmental, social, government factors that are describing the operations of the company. It is getting more popular for investors to focus on these factors when they are choosing where to invest.

The main feature is that these criteria can represent the ability of certain companies in terms of long-term performances and potential. If you want to read a detailed explanation about ESG, visit insights.diligent.com. Moreover, we are going to introduce you to the basics of these criteria and how they can help investors to make better choices in the future.

Main Features

The main focus is on the sustainability, responsible investing, and impact that it can have on the environment and social structures. While it is not essentially crucial for investors today to focus only on these criteria, it is getting more popular, and the main advantage is the security since companies with a higher ESG score have much better potential to grow.

The structure of criteria is divided into three main factors. These factors are related to the impact on the environment, impact on social groups, and the ability to comply with official regulations.

  • Environmental Criteria will examine the impact of the company on the environment. Important factors are consumption of energy and water, carbon footprint, levels of pollution caused by the activities of the company, impact on nature, waste of resources, and more. People are using it to evaluate the reliability of some company, and how they can perform in the future.
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As we can notice, the whole world is introducing new measures with a plan to cut the emission of toxic materials and decrease pollution to the maximum. Therefore, even if some company is working great today, with high profit, and excellent position on the market, these factors might affect it in the future in case that it does not comply to them.

  • When it comes to Social Criteria, it will evaluate the relation of workers inside of some company, and the quality of the connection between the executives and lower positions. For example, what are the standards toward increased security, and do all workers have proper health insurance while at work.
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Besides that, it is important to check if a business hires different structures, and how they are determining the positions. It is focused on the long-term goals and vision of brands and how the company is treating its workers.

  • The Governance is focused on the executives and owners of the business and their efforts to follow the official laws and regulations. Also, it will take a look at the right of workers in all positions.
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For example, what is the role of the executive manager, and does that person has the right to include some changes, and what process the company is using to accept or deny those proposals. Besides that, it will also check the relations with criminal activities or potential connection with some tax-avoiding methods, and other illegal actions.

Advantages of ESG Investing

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As we already mentioned, the investors are using these criteria to evaluate a company and decide whether it is a good option to invest in it. The main focus is on the long-term benefits of such investment, and these factors represent the best way to show if some brand has a good potential to grow in the future. It is using the most recent trends as factors, and ecology, the better status of workers, and legality are the most important ones.

When it comes to advantages, we have to mention the great potential to gain high profit. This is a rapidly growing trend. For example, there are over 400 funds that comply with these factors today, while there were less than 200 five years ago. The fact that a high ESG score means that a company has a good potential to grow over time brings a much higher chance for profit by investing in it.

On the other side, even if does not grow as expected, the risks of failure are much lower as well. Chances are very low that a company will lose value in case that it follows the regulations and activities issued by the government.

How to Measure ESG?

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First of all, you need to understand all of the factors, and how to apply them in the calculation. There is a formal method that you can use. Instead of that, you can create a calculation by using various data collected about a company. For example, you can include the use of renewable energy sources, materials used in the production, and vehicles the company is using.

Also, what are the products and services of such companies, and how they might affect people and the environment? Moreover, the relations between executives and lower positions, level of satisfaction of workers, and their ability to grow and improve their skills while working there.

This can be a very important factor and it is common for companies with high ESG to provide their workers with additional courses and the ability to have a successful career in the company that includes promotions. On the other hand, the ambient and safety of workers are also part of ESG. It will check out some incidents and the potential for new ones.

Another factor is related to activities on legal plan and ethics. That will show if some business had previous issues with the law, or even if there were some accusations of avoiding following rules, pay taxes, be responsible for waste of resources, impact on the environment, and more. All of these stats will help you to determine whether it is good to invest in a particular option or not.

Conclusion

It is crucial to learn more about these criteria since we are expecting that more companies will start to be more adapted to the factors it promotes. Since ecology and sustainability are some of the main topics today, investing in a business that is promoting these trends cannot be a mistake.

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