• jordancrahan

Understanding ESG Part One - The Environment

Updated: Apr 11, 2020

While socially responsible investing in one form or another has been around practically as long as investing itself has been an activity, the rise of ESG investing is a more recent development that hopes to formalize how investors can honestly and accurately asses a companies impact on the environment, its employees and community, and how well the company itself is governed. Since many of our readers may be encountering ESG investing for the first time we wanted to take a moment and make sure we fully explain each component, what it is, and what it isn’t so that you can start your investing journey with a full understanding of how your activity can shape the world around you. Keep in mind that all ESG metrics are currently self-reported in some form or fashion, but more universal standards are being developed to cut down on individual reporting differences. The E in ESG stands for the environment. This metric tracks anything that a company does that impacts the environment, both positively and negatively. This can include but is not limited to:

Total emissions

Use and disposal of toxic materials

Land use and its impacts

Renewable energy use

Supply chain sourcing

Investments in green technology

Recycling programs

Carbon Offsets

Other sustainability initiatives

When interpreting this type of data there are a couple of helpful things to keep in mind. While it is useful to interpret a companies 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 Boeing to Chevron doesn’t necessarily help you as much as comparing Shell and Chevron. It is also important to know 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.

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