ESG (Environmental, social and governance) criteria are of increasing interest to companies, their investors and other stakeholders. With growing concern about he ethical status of quoted companies, these standards are the central factors that measure the ethical impact and sustainability of investment in a company. ESG factors cover a wide spectrum of issues that have traditionally been excluded from financial analysis:

Environmental:
  • Climate change
  • Resource depletion
  • Waste and pollution
  • Deforestation
Social::
  • Working conditions, including use of child labour
  • Local communities
  • Conflict
  • Health and safety
  • Employee relations and diversity
Environmental:
  • Executive pay
  • Corruption
  • Political affiliations and donations
  • Board composition, diversity and structure
  • Tax strategy

As global interest in ethical investment grows, these factors have increasing financial relevance. There are many dedicated ESG professionals and many more who recognise the relevance of ESG information to gain a more meaningful understanding of corporate policy management and strategy.

ESG investing identifies and quantifies risks that are overlooked by traditional financial metrics, such as a company’s impact on the environment, its use of child labour or employee diversity. It is also concerned with executive pay, and how this relates to company performance, accounting and tax policies. Companies with sound policies are managed better and are more sustainable.

Today, ESG investing accounts for around a quarter of all professionally managed funds around the globe. Although institutional investors have a duty to maximise shareholder value, there is growing awareness that ESG ratings are an indicator of a company’s long-term performance, including return and risk, as well as its ethical standing.

One of the major barriers to successful investment had been a lack of quality, impartial data, but that’s changing rapidly.

Learn How to Incorporate ESG Factors Into Your 2021 Executive Remuneration Policy

Download our latest report with FTI Consulting to learn how companies and asset managers are linking ESG metrics in their executive remuneration policies, so you can mitigate scrutiny from investors.

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