Esg Definition: Sustainable Investing Funds
According to Robeco, an asset management firm, ESG uses Environmental, Social and Governance factors to evaluate companies and countries on how far advanced there are with sustainability. The firm also says that once enough information on these 3 criteria has been delivered, they can be combined with an investment process to help decide which equities or bonds are best to buy.Ultimately, ESG is a term that encompasses investments that aim to have positive returns and a long-term impact on people, planet and the on business performance. As it identifies investments potential risks and opportunities beyond technical valuations, ESG has the potential to enhance the traditional financial analysis mostly because these companies are more likely to outperform in the long-run when compared to the competition.
Why Is Cfa Institute Focused On Esg
CFA Institute consistently monitors key debates and evolving issues in the investment industry. ESG investing and analysis has become of increasing interest to investment professionals globally as governments, asset owners, and high-net worth investors consider the impact of ESG factors on their investments and local markets. We believe more thorough consideration of ESG factors by financial professionals can improve the fundamental analysis they undertake and ultimately the investment choices they make. CFA Institute is specifically focused on the quality and comparability of the ESG information provided by corporate issuers and how to integrate various ESG factors into the investment selection process.
Learn more about how global ESG regulations and sustainability reporting have evolved, and how CFA Institute has responded to these changes.
- Corporate Governance and ESG: CFA Program Refresher Reading
Exclusive to CFA Institute members, this CFA Program refresher reading gives an overview of ESG and corporate governance, its underlying principles and theories, and how these factors influence the investment decision-making process.
How Can My Organization Attract Investors Through Esg
It is vital for organizations to recognize and embrace the shift occurring in the investing world. No longer does the term investor solely refer to a select group of people. Rather, investing is increasingly understood as a tool to vote with ones dollars, attracting a diverse range of people around the globe. The range of factors investors consider when making decisions has become much broader, reflecting this gradual diffusion of more progressive and holistic ESG values into the investing arena.
As issues such as climate change and COVID-19 have demonstrated the fragility of business-as-usual approaches, they have also highlighted the importance of organizational resiliency. Shareholders and stakeholders expect a transition towards more environmentally, socially, and economically sustainable business activity to support future generations. Organizations must build their adaptive capacities by considering an increasingly wider range of metrics in their business operations and long-term strategies. By identifying ESG benchmarks which are material to them and setting robust targets against these, organizations can set themselves up for success.
For more information on creating business resiliency, download our ESG Roadmap to Resilience white paper.
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Sample Disclosures Of Management
American Airlines, 2019-2020 ESG Report, 4-5, aag-esg-report-2019-2020.pdf
Amgen Inc., 2021 Proxy Statement, 28, DEF 14A
AT& T Inc., 2021 Proxy Statement, 27, show.aspx?FilingId=14792553& Cik=0000732717& Type=PDF& hasPdf=1
Capital One Financial Corporation, 2021 Proxy Statement, 45, files/7b11ae39-d84e-4e42-b6fa-6422f840b56f
Cardinal Health, Inc., 2020 Proxy Statement, 23, CardinalHealth3020ProxyStatement
FirstEnergy Corp., 2021 Proxy Statement, 82, DEF 14A
Flex Ltd., 2021 Proxy Statement, 18, FLEX LTD. DEF 14A
General Mills, Inc., 2021 Proxy Statement, 31,
Lowes, 2021 Proxy Statement, 19, proxy-statement-v1.pdf
PayPal, 2021 Proxy Statement, 32,
Rayonier Inc., 2021 Proxy Statement, 13, Document
Teradata Corporation, 2021 Proxy Statement, 25-26, 0000816761/eb0eaebb-9534-4594-a90d-505138e5d3d4.pdf
Visa Inc., 2021 Proxy Statement, 20, DEFINITIVE PROXY STATEMENT
Willis Towers Watson Public Limited Company, 2020 Year-End Proxy Statement, 20,
The Rise Of Modern Governance
Measuring and reporting are just the beginning in this accelerating business environment. Boards will need to transform their practices to move from traditional oversight to more modern approaches to governance.
What is modern governance? It is Netflixadopting a transparent board-management communication model that caps board materials at 30-page outlines and focuses discussions on strategy. Good governance is alsoPrudentials boardrealigning its proxy disclosure to six governance principles adopted from the Investor Stewardship Group. In short, modern governance is the practice of empowering leaders with the technology, insights and processes required to fuel good governance.
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Transparency Issues And Corporate Governance
Transparency requires that every company report its profits and losses with accuracy. Overinvestment or a decrease in profits can severely undermine the company and its relationships with investors. Lack of transparency may also expose the group to penalties from regulators. It is important that a company disclose this information when its shares are being traded to those who make investment in it.
Other Terms For And Alternatives To Environmental Social And Governance Criteria
An increasing number of people are seeking to match their investment approach with their values, and different terms are used for doing this. Common terms that intersect and overlap with ESG criteria are as follows:
- Corporate social responsibility investing : CSR typically refers to the exclusion of sin stocks.
- Socially responsible investing : Interchangeable with CSR.
- Sustainable investing: Interchangeable with ESG, or it can be specific to environmental practices.
- Values-based investing: A broad term that could be inclusive of any of these others.
- Impact investing: Investing in companies in order to effect specific mission-related social or environmental change.
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Investors Increasingly Interested In Esg Criteria
Initially, it was the rating agencies specialized in sustainability that paid attention to these concepts, with more or less focus on some of them depending on the sector of the analyzed company. Sustainability or CSR teams were in charge of providing information to these agencies, which in turn shared their assessments with their customers.
Institutional investors have historically considered aspects related to corporate governance relevant for investing in banks. In recent years, their interest in the climate and social issues has progressively increased.
Some of the biggest asset management companies – especially those with passive management funds and also some active management funds, have created specialized teams, developing internal methodologies to assign their own sustainable ratings.
Therefore, âIn 2020, there was a notable increase in analysis and request for information on environmental and social issues from investors, which was also associated with progress in BBVAâs sustainability strategy, and with the publication of our first report from the Task Force on Climate-related Financial Disclosures in November, which was very well received,â notes the Investor Relations team. Thus, the Group made an extraordinary effort to interact with a focus on these topics at the end of 2020, and into 2021.
Esg Reporting And Its Importance
ESG reporting is the disclosure of all relevant data covering the companys operation in three areas- environmental, social, and governance. It provided a quick view of the performance of the company in these areas and its impacts on the investors.
The disclosure summarizes the qualitative and quantitative aspects of a companys performance aligned with ESG factors. ESG reporting helps the investors to avoid companies posing high financial risk due to environmental performance or due to social or governance practices.
Though ESG reporting is not compulsory, there is an increase in global regulation related to ESG reporting. Companies with good ESG scores have demonstrated higher returns on investment, low risks, and sustainability during crises. Proactive and future-oriented business understands the importance of ESG factors in their business strategy and purpose. These companies disclose the ESG data in their annual reports. One such example is the S& P 500 index whose 90% of companies published the ESG reports as of July 2020.
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Willingness To Be Unreasonable
And I don’t think Tesla would have succeeded if it had been a normal company that had adhered to the established governance codes. Would a normal board of directors have risked everything for a mobility revolution? After all, their failure was much more than a mere hypothesis at the beginning. Would a normal boss have survived the many moments of controversy? Would normal investors have withstood the pressure of shortsellers?
I doubt all of that. Now, Tesla may be an extreme example. But aren’t all companies that go beyond mediocrity fundamentally unreasonable? Progress relies on radical thinking and impatience with conventions and constraints. To quote Noubar Afeyan, Chairman of Moderna, We have to be willing to immerse ourselves in unreasonable proposals and unreasonable people in order to gain extraordinary insights from the idea that perfectly reasonable people doing perfectly reasonable things make great breakthroughs achieve is incomprehensible to me. “
Supporting ideas that may seem unreasonable at first glance, but have the potential to have a positive impact on society – that is our job as investors.
But the number of companies that really have the ability to change the world for the better is negligible.
And only a few of them will also ensure the added value for the investor.
As soon as they are discovered, we must continue to promote and challenge these companies.
What Topics Fall Under Esg And How Are They Rated
ESG issues cover a variety of topics that are applicable to all industries and organizations in one way or another. While the avoidance of sin stocks was traditionally considered central to investing ethically, ESG investing entails a broader scope of issues, including:
There are few areas of business operations where ESG is not relevant. However, not all ESG issues are given equal weight when it comes to investing. Just as every investor in the market has different values and motivations, it is unlikely that an organization will prioritize all ESG issues in their business strategy. Those that are prioritized by investors and organizations are determined by the environmental, social, and economic circumstances of the time, and what is deemed more important and material to a company, given their industry, geography, and specific circumstances. Some prominent ESG issues influencing investors include:
An organizations performance against ESG issues helps stakeholders make key decisions, and there are many tools available to measure or report on ESG performance. Some of the most popular include CDP, the Global Reporting Initiative , the Task Force on Climate-related Financial Disclosures , and EcoVadis. These groups help companies measure and report on performance in a range of areas including governance, climate-related risks and opportunities, emissions, resource management, procurement, engagement strategy, and many others.
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How To Report Esg Factors
The European Federation of Financial Analysts Societies says companies should point out how ESG is important for their businesses and share how they integrate ESG factors within their ESG strategy. They suggest that organizations develop and disclose their strategy to enhance transparency about risk exposure.In other words, the EFFAS invites companies to determine and communicate the current and future relevance of ESG topics. They advise presenting ESG data in the companys annual report, on the corporate website and in meetings with investors.But what data should be communicated? Well, the EFFAS defined nine areas to help assess a companys ESG performance. Along with these main topics that cover all industries and sectors, theyve also identified specific key performance indicators :
- Energy efficiency
- GHG emissions
If youre looking to start disclosing ESG information, apart from the EFFAS report, take a look at the London Stock Group Exchange report. They offer plenty of great tips, best practices, and trends on how to make a good ESG report.
Choose To Diy Or Get Some Help
If you want to create an ESG-style investment portfolio, youll have to decide whether you want to do it yourself by picking specific ESG investments or find a robo-advisor that will do the work for you.
I want to find my own ESG investments. If you like the idea of reading up on a companys sustainability initiatives or ensuring a funds companies are in alignment with your moral compass, you may want to build your own ESG portfolio. If you need a brokerage account, here’s how to open one. Keep in mind, some brokerages have screening tools that can help you sift through various ESG investments. Once you have a brokerage account, you can head to the next step.
This is a lot to keep track of. Help me! Building an investment portfolio takes time, especially when you are trying to find investments that align with a particular framework, such as ESG. Robo-advisors can make this easier. Robo-advisors are digital advisors that build and manage investment portfolios based on your risk tolerance and goals. Theyre usually much less expensive than in-person advisors. And now more than ever, robo-advisors are jumping on the ESG bandwagon often letting investors opt into a sustainable portfolio for no extra charge.
Just remember to investigate a potential robo-advisors methodology to make sure they use both inclusionary and exclusionary filters if you decide thats important to you. If you choose to work with a robo-advisor, you wont need to follow the rest of the steps.
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Governance: Navigating And Mastering The G In Esg
As environmental issues like climate change and social issues like diversity, equity, and inclusion dominate board agendas and stakeholder conversations, it can be easy to give the g in ESG short shrift. But boards overlook governance which guides oversight of everything from ESG metrics to ESG risks at their peril.
What is governance? How does it factor into ESG? What can board members, executives, governance professionals, and sustainability leaders at firms do to strengthen this important area of corporate oversight? Heres our guide.
An Overall Competitive Advantage
On the flip side, good governance practices have strong positive impacts, such as fewer instances of bribery, fraud and corruption over time translating to lower costs of capital, lower volatility, and overall competitive advantage.
Diligents 2019 research delivered a powerful argument for good governance. It found thatcompanies in the top 20% in terms of strong governance outperformed the bottom 20% by 15% over two years. Good governance helps investors realize the promise of their environmentally and socially responsible investments namely, stability and value over time.
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Esg Sustainable Investing: Governance Factor
Governance factors focus on corporate policies and how companies are governed. It is about making the responsibilities, rights, and expectations of stakeholders clear so that interests are met and a consensus on a companys long-term strategy is achieved. Examples of specific factors under which governance is analyzed can be:
- Tax strategy
- Board structure and brand independence
- Protecting shareholder interests
- Disclosing information on these topics.
The effects of these policies can go from aligning shareholders interests with management to avoiding unpleasant financial surprises and having a better social acceptance as a result of wealth being fairly distributed.
Balance Esg With Returns
ESG criteria dont actually impact portfolio returns, but they do determine if your companys actions are sustainable. For example, the oil and gas sector makes huge profits for their shareholders, but it is becoming increasingly apparent that they are more harmful than beneficial. Yet we still need transportation. There appears to be no evidence that ESG criteria might negatively affect portfolio returns, but with the recent increase in major weather events, that we must change. ESG strategies can help prevent the losses caused by poorly organized companies whose labor practices, environmental policies or governance issues result in fines, shutdowns or catastrophic losses.
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Evidence Of Esg In The Construction And Development Industry
As with many other sectors, environmental, social and governance considerations are becoming imperative to the construction and development industry, and this focus on various aspects of health and sustainability has only been exacerbated by the COVID-19 pandemic and major climate events.
Recent focus on companies ESG data and investments in sustainability results from increased social and environmental consciousness in consumers, investors and other stakeholders. Such metrics cannot be ignored by industries dealing directly with the built- and lived-environment.
While the construction and development industry has had programs reflecting some of these concepts in its repertoire for years, new practices, programs and metrics are emerging particularly in light of the global impacts of climate change and the ongoing pandemic. The use and implementation of ESG initiatives is expected to increase as governments and stakeholders become more focused on reducing emissions, improving project sustainability and providing greater investor stability. It is thus becoming a necessity for industry players to have policies and strategies in place to address ESG.
This bulletin summarizes some of the more prominent existing ESG initiatives and trends in Canada that industry players should be aware of as they look to develop their own ESG strategies.
Where ESG Meets Construction and Development
Mass Timber Construction
Low-Carbon Concrete Production
Governance In Esg Reporting
In the last of this three-part series, we analyze the governance component of Environmental, Social and Governance reporting.
- Governance in ESG Reporting
In the final entry of this series, we explore the governance component of environmental, social and governance reporting. By examining a companys internal procedures, leadership structure and potential conflicts of interest, good governance policies can help keep you out in front of potential violations or sanctions.
In prior installments, we discussed the importance of self-reporting on both environmental and social impacts. Now, well dive into how governance ties both of these together to help identify your companys risks while also presenting opportunities.
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