Understanding ESG Part 3 - Corporate Governance
Updated: Apr 12, 2020
Welcome to the final installment in our series on understanding ESG investing. If you have not yet read part one and part two yet, we recommend you do so here and here before continuing. It will provide a helpful foundation for your overall understanding as well as outlining the environmental component of ESG investing. In this final lesson, we’ll be covering the G in ESG, which stands for governance. This metric tracks how well the company is managed, how it interacts with its shareholders. Governance has much more of an inward focus on the companies own behavior whereas the environmental and social metrics have much more of an outward focus. Things tracked under the governance metric include but are not limited to:
Does the company have a well-defined stance on its own responsibility to society?
Does it act accordingly?
How the company interacts with its shareholders.
Does it treat shareholder submitted proposals fairly?
Board of Directors’ composition. Is it comprised of insiders or a well-rounded group of skilled advisors?
Since we have the opportunity we'll give you one final reminder that while it is useful to interpret a company's overall score as either positive or negative you can get additional context by comparing it to other scores from companies in the same industry. Comparing Tesla to Wells Fargo doesn’t necessarily help you as much as comparing Tesla and Ford. And, as we’ve stated before it is also important to remember that ESG investing typically takes a more active approach to making change than simply avoiding “bad” companies. You are welcome to use our tools to screen out “bad” companies if you like but in order to get the most out of an ESG investing strategy consider using these scores to identify areas of opportunity where investors can help push a company to change in a positive way. Simply ignoring companies that contribute to the problem doesn’t go as far as trying to play an active role in getting these companies to become part of the solution.