Over the last several years the term “ESG” has risen to prominence. Investors are increasingly making deals that impact environmental, social, and governmental social standards — meaning that everyone from Wall Street to independent boutiques are thinking more critically and broadly about corporate impact. Strategies that help dealmakers align their firm’s values with their investment portfolios have become incredibly popular.
At Finalis, we recognize that there’s a tremendous opportunity to play a proactive role in stimulating the further development of the ESG sector.
So, let’s dig in and explore some of the concepts involved. Environmental, Social, and Governance (ESG) Investing, was listed as one of the top investment areas in our last article. This consists of investments made into a wide array of companies that score highly on environmental and societal responsibility scales as determined by third parties (typically independent companies and research groups).
ESG Scores… How are they calculated?
Curious about how scores are built? Here’s some of the criteria used to evaluate companies for ESG investing:
- Environmental — refers to the kind of impact that companies have on the environment. This can include a company’s environmental footprint, toxic chemicals involved in its processes, and sustainability efforts in its supply chain;
- Social — connects with the type of relationships companies have with people and institutions where they do business (e.g., labor relations, hiring practices, diversity and inclusion politics); and
- Governance — involves the internal system of practices, controls, and procedures that companies adopt in order to drive positive change and comply with laws.
ESG research firms produce quantified scores for a wide range of companies, providing a transparent metric for comparing different investments. Among some of the well-known ESG research companies in charge of building these metrics are Bloomberg, S&P Dow Jones Indices, JUST Capital, MSCI and Refinitiv.
How does corporate focus on ESG affect a company’s equity returns?
The fact that environmental, social, and governmental impacts are measured may make some uncomfortable, especially when it comes to research organizations conducting deep dives on companies. However, according to McKinsey, corporate focus on ESG actually correlates with higher equity returns.
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