ESG Criteria

ESG (Environmental, Social, and Governance) criteria serve as a comprehensive framework used by investors, asset managers, and stakeholders to evaluate a company's operational sustainability and ethical impact. Moving beyond traditional financial analysis, which focuses solely on profitability, the ESG lens provides critical insights into a company's resilience, risk management, and long-term value creation. For a growing number of investors, integrating these non-financial factors is essential for identifying high-quality, future-proof investments and managing portfolio risk.

The ESG framework is broken down into three core pillars, each covering distinct areas of corporate behavior and impact:

• Environmental (E): This pillar assesses a company's impact on the natural world. It is a critical component for climate-focused investors. Key metrics include:
  • Carbon footprint and greenhouse gas (GHG) emissions
  • Energy efficiency and use of renewable energy
  • Waste management and pollution control
  • Natural resource conservation and water usage
  • Policies on climate change and decarbonization strategies
• Social (S): This pillar examines how a company manages relationships with its employees, suppliers, customers, and the communities where it operates. It is a measure of the company's social license to operate. Key metrics include:
  • Employee health and safety
  • Diversity, equity, and inclusion (DEI) policies
  • Labor standards and human rights in the supply chain
  • Customer data privacy and security
  • Community engagement and social impact
• Governance (G): This pillar relates to a company's leadership, internal controls, and shareholder rights. Strong governance is often seen as the foundation for delivering on the "E" and "S" pillars. Key metrics include:
  • Board composition and independence
  • Executive compensation structures
  • Shareholder rights and transparency
  • Business ethics and anti-corruption policies
  • Audit and internal control quality

Concrete Examples

• Positive ESG Profile: A technology company that powers its data centers with 100% renewable energy (strong E), implements robust diversity and inclusion programs (strong S), and maintains an independent board of directors with a separate CEO and Chairperson (strong G) would likely receive a high ESG rating.
• Negative ESG Profile: An industrial company that fails to report its carbon emissions, faces recurring lawsuits for poor labor conditions, and has a history of corruption scandals would be flagged as a high-risk investment by an ESG-focused fund. This poor performance indicates potential for future financial liabilities and reputational damage.

Investing directly in carbon allowances, while a pure-play environmental strategy, is often motivated by the principles of ESG investing. It allows investors to have a direct and measurable impact on the "E" pillar by contributing to market mechanisms designed to reduce emissions.

For further reading on how this framework fits into broader investment philosophies, see our article on the difference between ESG and Impact Investing. For an authoritative overview, refer to the global standards set by the UN Principles for Responsible Investment (PRI).