Environmental, Social & Governance: What is it? What Does it Mean For You?

The word “sustainability” is frequently used as a buzz word in the business and consumer community, continuously trending, in some capacity or another. As a consumer, I am constantly shopping (and investing) with a ‘vote with my spending’ mindset, attempting to purchase or invest with companies or businesses that have the same values, morals, and ethics that I do in any capacity (environmental, naturally derived ingredients, fair-trade, social governance etc). Buzzwords such as ‘natural, sustainable, organic, fair-trade, and even profits to charity’ are all catch words that grab consumers attention to assist in the consumption of their goods or services. But what do these words really mean and how can you measure or truly know that a company aligns with your values/morals/ethics?

That is where ‘Environmental, Social & Corporate Governance’ (or ESG) steps in. ESG refers to the three main factors that make up ‘sustainability’ (environmental, social, and economic), but provides a more measurable set of metrics that hold businesses accountable, rather then showcasing ‘fluff’ buzzwords that carry no value. These metrics can vary from company to company based on applicability, but generally follow a core set of 21 metrics (or 34 expanded), focusing on four areas: people, prosperity, planet, and principles of governance. In these focus areas, some metrics and disclosures that are standard are anti-corruption, greenhouse gas emissions, water consumption, stakeholder engagement, health and safety, jobs created and even economic contribution.

For the most part, ESG is more widely associated with investments that consumers, or investors rather, use to help better determine the future financial performance and longevity of companies. In this, it is a tool for such investors to evaluate companies to make responsible investments that align with their values/ethics/morals without having to compromise on returns. The criteria holds value for investors that have the idea that if corporations incorporate environmental, social and corporate governance into their business model, than there is a higher chance these businesses returns and financial wellbeing improve (based on the fact that they are well positioned for the future and changing markets). These metrics are also helpful for investors to avoid companies that perhaps pose a greater financial risk due to their ESG practices/metrics.

Many companies have now established ESG as a baseline for investors to evaluate their company before making financial decisions. These companies have dedicated people and positions to formulate ESG reporting metrics and have them write reports or upload analytics to web-based platforms. There are also many third-party web-based platforms that assist in analyzing the ESG of major companies, such as sustainalytics.com, which provides its own rating system for each major corporation. Given this, it can be as simple as doing a quick google search or as complicated as reading a 50-page analytical report documenting all ESG measures per company – it all depends on the level of knowledge you want as an investor/consumer.

So are you going to read a 50-page ESG report to ensure you are morally purchasing your next box of cereal? Probably not- but essentially the same principals apply if you wanted to. Consumers and investors alike should use their spending as a vote towards goods and services they believe in, morally or otherwise. ESG provides the accountable criteria for businesses to allow all of us to make responsible spending decisions. We as consumers and investors need to stop allowing the fluffy/trendy words to grab our attention and focus on real hard data from reported metrics. This is easier said than done, but if you genuinely want to ‘vote with your spending’ or ‘invest in something you believe in,’ then using ESG metrics is the best possible way to know exactly what your dollars are going towards.