A new approach to asset allocation
How do you determine which companies to invest in, and which to avoid? Traditionally, companies have been compared based on their profitability, risk profile, and growth prospects. This analysis has left out environmental, social, and governance factors. ESG investing is an asset allocation strategy that brings these criteria into the conversation by comparing a company's ESG factors alongside more traditional valuation metrics. For this reason, the term “ESG” is often used synonymously with words like sustainable investing, socially responsible investing, or impact investing.
Environmental factors consider how a company's operations interact with and impact the natural world. How a company influences climate change, carbon emissions, or resource extraction are all considered.
Social issues cover how a company's operations impact human rights, dignity, and work conditions for their employees. Companies with high social scores pay good wages and provide safe and wellness-minded environments for their employees to work.
The "G" in ESG stands for Governance and addresses factors such as board diversity, tax transparency, and the implementation of policies that keep the company compliant with the laws and regulations that govern their industry.