ESG — Environmental, Social, Governance
What is ESG? Explanation of environmental, social and corporate governance criteria in context of investing and company evaluation.
What is ESG?
ESG is an acronym for Environmental, Social, Governance. It's a set of non-financial criteria used to evaluate companies and investment funds.
Three pillars of ESG
Environmental
Assessment of company's impact on natural environment:
- CO₂ emissions and carbon footprint
- Water and energy consumption
- Waste management
- Biodiversity protection
Social
How company treats people:
- Working conditions and safety
- Diversity and inclusion
- Relations with local communities
- Customer data protection
Governance
Quality of company management:
- Board independence
- Executive compensation transparency
- Anti-corruption policy
- Minority shareholder rights
ESG in investment practice
ESG ratings are assigned by agencies like MSCI, Sustainalytics and S&P Global. MSCI scale: AAA (leader) to CCC (worst). ETF funds with ESG filter exclude companies with low ratings or weight them lower in portfolio.
In European Union, SFDR regulation (Sustainable Finance Disclosure Regulation) divides funds into:
- Article 6 — no special ESG approach
- Article 8 — promotes ESG characteristics
- Article 9 — has specific sustainable development goal
ESG and financial performance
Contrary to concerns, companies with high ESG rating don't achieve worse results. Research indicates positive or neutral correlation with financial performance — partly because good ESG risk management reduces probability of scandals, regulatory penalties and reputational losses.
How Freenance can help
Freenance allows tagging investments in portfolio as ESG and tracking what percentage of your wealth meets sustainable development criteria. You build portfolio aligned with values — without losing control over results.
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