Environmental, Social and Governance criteria (ESG) are the standards that investors are increasingly using to evaluate a corporation’s operations and performance. About one-third of companies have reportedly received inquiries from sustainability analysts, and ESG criteria have started to shape their business strategies. Investors seeking companies that meet ESG criteria value returns, but don’t prioritize profits over companies that don’t fit into their ethical frameworks.
Environmental criteria evaluate a company’s energy use, waste, pollution, natural resource conservation, and animal treatment. ESG criteria also evaluate how a company manages environmental risks that may affect a company’s income. The social criteria evaluate a company’s business relationships; such as if a company donates a percentage of its income or volunteers in the community. The governance aspect is if a company uses transparent accounting methods, avoids conflicts of interest in board members, and if common stockholders are allowed a vote in board meetings. Sustainability Accounting Standards Board (SASB) is a nonprofit that has developed sustainability metrics to create a uniform disclosure of sustainability metrics for public companies to use in public reporting.
Investment research company, Morningstar, released the first sustainability ranking for mutual funds, where companies are ranked and compared to industry peers in their environmental, social, and governance performance. Morningstar’s sustainability rankings have been applied to over 21,000 mutual and exchanged-traded funds globally and are calculated by determining a fund’s portfolio sustainability score, then by assessing its sustainability score relative to its peers.