Environmental, social, and governance (ESG) criteria has become an essential part of the investment process.  Depending on the availability of data, ESG can be integrated into the investment process for making decisions.  It can also highlight companies that may carry a greater financial risk due to their environmental or social or governance practices.

In a nutshell, the ESG criteria is a set of standards for an organisation’s operations that can be used to evaluate the organisation. Investors look at a broad range of behaviours under the three topics of ESG:

• Environmental: It considers how an organisation performs its responsibility towards environment and its sustainability. The criteria may include its use of energy, treatment and disposal of waste, handling of pollution, conservation of environment, preservation of natural resources, management of environmental risks and compliance with various environmental protection laws
• Social: It considers how an organisation manages its conduct with customers, suppliers, employees, and the communities. The criteria may include its values and policies which drive business relationships with customers and suppliers, trade practices, working conditions of employees, health and safety records, consideration of community interests in projects, and so on.
• Governance: It considers how an organisation deals with leadership, executive pay, internal controls, and shareholder rights. The criteria may include transparency of accounting methods, appointment of board members, conflicts of interests, anti-bribery and corruption policies, political relationships, and protecting shareholder interests.

It is unlikely that an organisation scores the best in all criteria. It is still an evolving topic, and most companies are on a journey to transform their businesses, in support of ESG considerations. Depending on industry sector and geographies in which they operate, some companies would have progressed well in some of the criteria whilst still working on the others. In the meantime, investors, of course, need to decide what’s most important to them in making their investment decisions.