There are many factors that can impact returns on ESG investments, contributing to this apparent decline. But rather, could these factors indicate a cyclical nature to ESG investing? This post will explore the criteria for ESG rating, the factors that contribute to its profitability, the recent trends in ESG investing, and if we ought to invest in ESG companies.
What are the ESG Ratings Criteria?
Companies are rated by ESG firms, such as CDP and ISS-ESG, which assess the environmental, social, and corporate governance practices of the organization. Investment rating service, Morningstar®, has also added ESG ratings to its company and fund evaluations. The three categories of ESG are used to determine if a company is being responsible and making progress towards improved corporate practices.
The details of these three criteria in ESG ratings are:
• Environment: This new generation of investors are concerned with the long-term effects on the local and global environment. How a company is impacting and investing in the health of the planet is important to these heirs of the earth.
They not only highly value thenatural word, but want torepair and preserve it for future generations. Under this guidance, companies can no longer afford to carelessly dump pollutants into the earth. They will need to demonstrate environmental responsibility.
• Social: Social ratings include the impact of the company on current social issues, including diversity, equity, and inclusion (DEI) policies, and its role in supporting social issues. Corporate policies on, and action towards, improved diversity, equity and inclusion are important factors for minority investors.
• Governance: Governance ratings pertain to how leadership manages company resources, including its employees andits efficacy in driving positive change. For example, corporate tax percentages, wage gap discrimination, public policies on maternity leave and leadership relatability influence public perception of corporations.
According to Forbes, within these criteria, there are differences in how ESG rating firms rate companies. However, there are a few common tools used across the board, reports Forbes, such as “annual reports, corporate sustainability measures, resource/employee/financial management, board structure and compensation and even controversial weapons screenings.”
These tools are used to help to determine where a company’s money is going and how the company is being managed. This rating system helps to promote corporate transparency and provides investors with greater insight into their investments.
Factors to Consider in ESG Investing
