ESG stands for environmental, social, and governance investing. It is widely viewed by investors as a socially responsible way to build an investment portfolio. ESG considers environmental, social, and governance factors to judge an investment’s potential returns as well as its overall impact.

Environmental criteria assess an organisation’s performance relative to environmental challenges, such as reducing carbon emissions or a commitment to working to minimise waste. Social criteria assess internal treatment of employees, such as diversity and fair labour conditions. Governance criteria assess how a company is run, including tax practices, corruption, and board structure.

An increasing body of research indicates a positive link between ESG performance and the financial performance or value of an investment. The idea is that companies are more likely to deliver strong returns if they create value for all stakeholders, including their wider society. ESG analysis considers a company’s current actions and the implications they’ll have on their surrounding society, making them perhaps the most socially conscious investment vehicle.

There is currently no globally accepted measure of ESG. While many data providers do offer a single combined ESG score, this score assumes a common set of values across investors. Scores may consider hundreds of different ESG factors, so it pays to be attentive to what a given score has included. In Europe, financial market participants need to take into consideration SFDR. This sets requirements for Funds based in the EU as well as those managing capital raised in the EU.

Strong ESG performance can create several advantages, including significant downside protection in volatile periods, a more stable investor base, better access to financing, higher levels of employee engagement, and improved customer loyalty.

Global ESG assets currently equal USD $35.3 trillion, or more than one-third of all assets in five of the world’s biggest markets. ESG assets are on track to exceed USD $53 trillion by 2025.

Governance refers to the way businesses are run and make decisions, which can include everything from corporate policy to the level of diversity on the board and executive level. Compensation and oversight of organisational leaders are core issues for ESG investors, who are looking for ethical, well-balanced leadership likely to lead a company to a successful outcome.

ESG investing has certainly surged in popularity over the past two years, particularly following the COVID-19 pandemic. However, the widespread industry expectation is that ESG investing will maintain momentum or continue to accelerate over the coming years, as evidence of climate change, lack of diversity, and other pressing issues remain at the forefront of our collective consciousness.

Some firms offer “ESG scans” to assess the strengths and weaknesses of your company’s ESG programme. The core value of these scans is to use feedback to enhance ESG performance in various market ratings.

Investors around the globe are becoming increasingly frustrated with the lack of consistency amongst required disclosures from firms as they seek to invest in ESG-focused companies.. To that end, several countries have initiated legislation that will require public and private firms to disclose information on select ESG issues in traditional financial disclosures and standardised reports. For instance, SFDR has been introduced by EU in 2021 and relates to the publication of information from financial market participants on the sustainability of their investment decisions. This sets requirements for Funds based in the EU as well as those managing capital raised in the EU.

An ESG score measures a firm’s level of environmental, social, and governance risk. Many of these risks carry long-term financial implications, but have not been traditionally required in financial disclosures and standardised reports. The objective of the ESG score is to give investors a more in-depth view of a firm’s long-term investment potential.

ESG investing analyses a company’s environmental, social, and governance practices alongside traditional financial measures to create a more robust picture of a firm’s long-term potential for investors. Impact investing is a form of thematic investing which supports projects or businesses which have a specific goal of benefitting society or the environment.