Environmental, Social, and Governance Criteria

Environmental, social, and governance (ESG) criteria are a set of standards for a company’s behavior used by socially conscious investors to screen potential investments. Environmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change, for example. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

Investors have, in recent years, shown interest in putting their money where their values are. As a result, brokerage firms and mutual fund companies have started offering exchange-traded funds (ETFs) and other financial products that follow ESG criteria. Robo advisors including Betterment and Wealthfront have promoted these ESG-themed offerings to younger investors. ESG criteria are also increasingly informing the investment choices of large institutional investors such as public pension funds. According to the most recent report from US SIF Foundation, investors held $17.1 trillion in assets chosen according to ESG criteria at the end of 2019, up from $12 trillion just two years earlier. ESG investing is sometimes referred to as sustainable investing, responsible investing, impact investing, or socially responsible investing (SRI). To assess a company based on ESG criteria, investors look at a broad range of behaviors and policies. ESG investors seek to ensure the companies they fund are responsible stewards of the environment, good corporate citizens and are led by accountable managers. Environmental criteria may include corporate climate policies, energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also help evaluate any environmental risks a company might face and how the company is managing those risks. Considerations may include direct and indirect greenhouse gas emissions, management of toxic waste, and compliance with environmental regulations. Social criteria look at the company’s relationships with stakeholders. Does it hold suppliers to its own ESG standards? Does the company donate a percentage of its profits to the local community or encourage employees to perform volunteer work there? Do workplace conditions reflect high regard for employees’ health and safety? Or does the company take unethical advantage of its customers? ESG governance standards ensure a company uses accurate and transparent accounting methods, pursues integrity and diversity in selecting its leadership, and is accountable to shareholders.

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