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Environmental, Social and Governance (ESG)

Definition

ESG stands for Environmental, Social and Governance, three critical factors used to evaluate the sustainability and ethical impact of an investment in a company or business. These criteria help to better determine the future financial performance of companies (return and risk).

  • Environmental criteria consider how a company performs as a steward of nature.

  • Social criteria examine how it manages relationships with employees, suppliers, customers and the communities where it operates.

  • Governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights.

Importance of ESG

ESG metrics are increasingly important in the investment decision-making process. Investors use ESG criteria to screen potential investments, manage risks and seek to ensure that their investments promote environmental stewardship, social responsibility and good governance.

Conclusion

Embracing ESG criteria is crucial for forward-thinking investors who prioritize sustainability and ethical considerations alongside financial returns. By integrating ESG factors into their investment strategies, firms and individuals can contribute to societal goals while potentially enhancing portfolio performance and mitigating risks associated with environmental, social and governance failures.

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