For this week's edition of Macro Mondays, I decided to talk about one of my favorite areas of investing: ESG stocks.
I recently attended the annual US SIF conference in Chicago, where hundreds of financial advisors, brokers, academics and researchers met to discuss trends and implications of socially responsible investing practices and products. One acronym that gets thrown around constantly is "ESG" which stands for "Environmental and Social Governance". These stocks are evaluated and held to a much higher standard than the traditional run-of-the-mill investment.
Dying to know more about them? I'm sure you do. Here's another Macro Monday explanation via Investopedia:
What is the criteria for 'Environmental, Social and Governance' (ESG) Stocks?
The Environmental, Social And Governance (ESG) Criteria is a set of standards for a company’s operations that socially conscious investors use to screen investments. Environmental criteria looks at how a company performs as a steward of the natural environment. Social criteria examines how a company manages relationships with its employees, suppliers, customers and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits and internal controls, and shareholder rights. Investors who want to purchase securities that have been screened for ESG criteria can do so through socially responsible mutual funds and exchange-traded funds.
How are 'ESG' Stocks used in the Market?
Environmental criteria look at a company’s energy use, waste, pollution, natural resource conservation and animal treatment. They also evaluate which environmental risks might affect a company’s income and how the company is managing those risks. For example, a company might face environmental risks related to its ownership of contaminated land, an oil spill it was responsible for, its disposal of hazardous waste, its management of toxic emissions or its compliance with the government’s environmental regulations.
Social criteria look at the company’s business relationships. Does it work with suppliers that hold the same values that the company itself claims to hold? Does the company donate a percentage of its profits to the community or perform volunteer work? Do the company’s working conditions show a high regard for its employees’ health and safety? Are stakeholders’ interests taken into consideration?
With regard to governance, investors want to know that a company uses accurate and transparent accounting methods, and they want to see that common stockholders are allowed to vote on important issues. They also want companies to avoid conflicts of interest in their choice of board members. Finally, they prefer not to invest in companies that engage in illegal behavior or use political contributions to obtain favorable treatment.
What constitutes an acceptable set of ESG criteria is subjective, so investors will need to do the research to find investments that match their own values.
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