What Is ESG?
The term “ESG” has become more widespread in recent years as people and companies make investment decisions based not just on returns but also on alignment with their values. “ESG” stands for environmental, social and governance — ESG investing tracks impact on the wider world.
Environmental factors answer the question, “What kind of impact does a company have on the environment?” This category can include considerations like carbon emissions, vulnerability to climate change, manufacturing processes, waste disposal, packaging, renewable energy use and water use.
Social factors answer the question, “What kind of impact does the company have on people and communities?” This can include considerations like labor management, commitment to diversity and equity, worker care and safety, ethical sourcing, privacy, inclusionary programs and hiring practices, corporate social responsibility and product safety.
Governance factors answer the question “What kind of leadership does a company have?” This category can include considerations like pay differences, diversity in leadership, leadership’s crisis responses, company ownership, business ethics and transparency.
What Is an ESG Score?
A company’s ESG score is meant to express the company’s performance on ESG-related matters and the ESG-related risk that a company is taking on with its decisions. The purpose of an ESG score is to help people and institutions make informed decisions about investing in or working with companies.
While other companies and individual investors don’t have the capacity to research every detail about a company, many third-party groups, independent companies and research groups have been established to dive into company information to calculate ESG scores and provide comparisons. Some of the top providers of ESG scores include Bloomberg ESG Data Services, Corporate Knights Global 100, Sustainalytics ESG Risk Ratings, Dow Jones Sustainability Index Family, Thomson Reuters ESG Scores, MSCI and Institutional Shareholder Services.
What’s a Good ESG Score?
Companies with good ESG scores are considered to be better prepared to handle risks in the future, predict good opportunities, make good long-term decisions and prioritize long-term success over short-term gains.
Each monitoring organization has its own ESG rating methodology — some are numerical and some are letter grades. Before making any investing decisions, be sure you understand the scoring system of the source you’re using.
How Do I Know if My Portfolio Is ESG-friendly?
ESG considerations aren’t just for companies — you can use ESG scores to look at how your investment portfolio aligns with your values.
Some investment companies provide information on the ESG score of portfolios of a certain size. You can also determine this yourself with research. Use an asset-weighted average of company ESG scores for the holdings in your portfolio.
If the result is lower than you want, you can add or remove specific companies, mutual funds or industries from your portfolio. Talk with a Farm Bureau financial advisor; they can help you make decisions that align with both your financial goals and your values.