What Is ESG? Why Does It Matter in Corporate Governance?

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The surging demand of ESG (environmental, social, and governance) criteria has made impact investing more common. At the same time, it creates more exacting standards for corporations and brokerage firms to comply with.

About Environmental, Social, and Governance (ESG) Criteria

ESG investing—also known as impact investing, sustainable investing, and socially responsible investing (SRI)—is the practice of investing in organizations that follow environmental, social, and governance criteria. These investors want to contribute their funds toward companies they feel act responsibly, and certain criteria are used to measure that.

Some examples of these criteria are detailed as follows.

Environmental

Environmental responsibility includes such criteria as efficient energy use, minimizing pollution, humane treatment of animals, and conserving natural resources. In addition, the company’s management of environmental risks may be considered, such as how they minimize and manage hazardous waste.

Social

The social criteria used in ESG investing may include the organization’s business relationships and overall social impact. Its treatment of employees, management of working conditions, choice of suppliers, and community involvement may all be considered here.

Governance

Governance refers to the way the company as a whole is run, particularly when it comes to financial accounting and overall management ethics. For instance, the company should be transparent with its financial reporting, and board members should have no conflicts of interest.

Why Does ESG Matter?

ESG matters have become more important to more investors, and that has created demand from brokerage firms and companies. As of 2021, nearly 20% of investors have incorporated ESG standards into their investment portfolio, so it is gaining traction. Because of this, brokerages and mutual funds have begun offering more financial products that follow these criteria.

This means investors, brokerages, and companies will all see an impact in the coming years.

For Investors

Investors who want to invest responsibly now have more options than ever before. It used to be that SRI would mean limiting your options, but that is becoming less prevalent as more ESG investment options are being offered.

It’s worth noting that most companies will not be able to meet all the criteria described above, so it’s important to choose what you value most and prioritize those items as you invest.

For Brokerages

Brokerages can appeal to conscientious investors by offering ESG-based investment options. This will mean doing more research into each company’s environmental / social responsibility and governance practices. While this may increase the amount of due diligence involved, it does have the potential advantage of weeding out companies that have financially problematic or risky practices, so it may create a more sound portfolio overall.

For Corporations

There’s more pressure than ever before on corporations to execute their operations in a responsible and transparent manner. Adopting sustainable practices and improving reporting can all provide more of an edge in coming years when it comes to securing investment funding. Monitoring best practices and regulatory developments can help in this process of continuous improvement.

Navigating the Legal Elements of ESG Funding

ESG investing can involve a great deal of due diligence from investors, brokerages, and corporations alike. It may require adopting new practices, changing procedures, and improving processes, all of which could have both legal and practical ramifications.

Legal guidance can be provided through a corporate attorney. If you’re interested in ESG as part of either corporate governance or investing, contact an attorney to help you navigate the process.

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