Environmental, Social, and. Governance (ESG) criteria are used to evaluate a company by investors in addition to the financial situation. If you are a beginner in finance, you must have thought a company’s financial situation is everything that matters to the investors. But, there is more to it. What is ESG investing? Let’s drill it down.
When a company is evaluated on the terms of ESG, they increase the value of trust to the investors and allow them to make a firm decision. But what exactly is ESG, and should you bother with it as a company or an investor?
What is ESG Investing? A Definition
ESG stands for Environmental, Social, and Governance criteria that help evaluate a company based on how good or bad is their work nature.
ESG has many aliases; some call it socially responsible investing or socially conscious investing. This is because it helps the investors know the company’s true value based on social factors.
It is also called Green investing or sustainable investing as it ensures the investors that the company is taking its steps towards the Green world and environmental friendliness.
A company needs to be environmentally and socially responsible, but in addition to this, a company should also have a good working legal structure. This is also a reason why ESG is called ethical investing.
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Let me Break Down ESG and help you understand what ESG stands for –
A company is evaluated before investment based on the reaction to the environment. This means how good the company is working towards a better planet and harming it in any way.
To give you an example, suppose a company produces tons of waste during the manufacturing of products. If the waste is not taken care of and is released in the open environment, there is a high risk to human life and nature. In such a case, the company loses potential value, and it can be shut down in the following weeks. Investing in such a company will only incur losses to investors.
This is only an example of a particular aspect in regards to environmental criteria. If the company is harming nature in any way or posing a risk to life, or if it does not involve protecting nature and working towards it, the company fails on the environmental criteria of the ESG.
Investors are looking for Green investing or sustainable investing that increases the potential value of the company.
Also read: What is Earnest Money & How does it work?
2. Socially Responsible
One of the important factors the investors usually observe rather than ask for; how socially responsible a company is?
The socially responsible criteria evaluate the companies relation with people. These include how good the company is towards employees, clients, suppliers, customers, and their place.
If the company cannot maintain good relationships with its own people or the community, there is a high chance of it falling before it rises. This is because the company loses goodwill or nature when they fail to be socially responsible towards the community they work closely with.
A socially responsible investing takes place only when the company is socially responsible.
3. Governance or Working Structure
The governance of the company directly influences its financial positions and the potential value for investing. An investable company has a good profile on its internal audits, executive compensation, internal controls, and shareholder rights.
If a company has weak spots in its governing or working, an investor can easily understand the company has a poor structure and has no worth if invested.
To fix the company’s governance, the administration can improve the benefits to the employees and make proper internal audits. Moreover, the most important thing they need to do is to bring clarity to the shareholder’s rights and bring control to the company’s working. You can use working procedures such as accrual-basis accounting to calculate your company’s exact valuation and assure the investor.
Also read: What is IPO? [Definition and Advantages]
How is the ESG score Calculated?
There are different measuring techniques to calculate the score of ESG; I found Refinitiv‘s way much handy, but if you are a company, the investors might want to use their own measuring method. All you need to do is work with goodwill and follow Green investing, Socially responsible investing, and ethical investing. If your practices are good, you will have a decent ESG score, and investors would love to invest in your company.
Top 10 Companies in India with Benchmark ESG Scores
|2||Mahindra and Mahindra Ltd.|
|3||Tata Chemicals Ltd.|
|7||Hindustan Unilever Ltd.|
|8||Godrej Consumer Products Ltd.|
|9||Grasim Industries Ltd.|
|10||Bharat Petroleum Corporation Ltd.|
Reference from Future Scape Subject to change *
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Top 10 Companies with Best ESG Scores in the United States of America
|4||West Pharmaceutical Services|
|7||Cadence Design Systems|
|9||Comfort Systems USA|
Reference from Investors.com Subject to change *
Also read: 12 Characteristics of an Entrepreneur
Frequently Asked Questions
ESG stands for Environmental, Social, and Governance criteria that help to evaluate a company on basis of how good or bad is their work nature.
Yes, ESG investing is great as a study elaborates on how highly sustainable long-term companies follow these metrics.
Socially responsible investing dictates only certain factors, while ESG is a much broader concept. They both are not the same, but we can say that SRI is a subset of ESG in an actual manner.
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