ESG is an acronym you may have heard cropping up more and more over the past few years. As society becomes more aware of the importance of creating a sustainable way of living, businesses are adapting to the need for ethical ways of working. This is not only out of a moral obligation, but also due to the growing popularity of impact investment.
The next generation of millennial investors will be some of the most critical in history when it comes to the ethics of organisations they invest in. But, in order to invest impactfully, we need to be able to measure impact – that’s where ESG comes in!
But what exactly does it mean? Well, ESG refers to the 3 key areas of a business that should be considered when measuring its ethical and social impact on the world.
E – The ‘E’ stands for, you guessed it, Environmental.
Probably the first thing that most people think of when talking about sustainability, the ‘E’ covers everything to do with a firm’s contribution to preserving the planet’s natural resources and reducing climate change. From the amount of greenhouse gas emitted when producing a product, to whether or not you remember to turn off the lights when you leave the office, these are all Environmental factors.
S – The ‘S’ is for Social factors.
The way a business treats its stakeholders; employees, consumers and surrounding communities are all relevant to determining how ethical it is. We must factor in whether a company pays a living wage, the diversity of its management bodies (are women, POC and other marginalised groups being represented?), consumer protection and many other areas.
G – The final area we look at is ‘Governance’.
This covers the management of a firm, including transparency about its business practices, anti-corruption policies and, perhaps most importantly, the extent to which management looks to measure and improve social impact.
There is no universal metric for measuring social impact, maybe because it is not a ‘one size fits all’ process. Factors that need to be considered vary immensely, not just by industry, but by the size and scale of each business. For example, a large corporation producing a product will have vastly different environmental considerations in comparison to a small business providing a service.
Because of the lack of a clear list of criteria, it can be easy to feel lost when knowing where to start measuring the social impact of a business, but doing so is a vital part of impact investment. It can be especially challenging because many of the existing benchmarks are rife with issues.
Some people choose to look for companies that have committed to the UN Sustainable Development Goals, but these goals are widely disputed. Between ecologists challenging the accuracy of the index rankings and economists challenging the realism of being able to eliminate world hunger by 2030, committing to these goals isn’t a good enough indicator of a business’s social impact.
Others look for organisations that are certified B Corporations. This is a good starting point, as B Corporations are extremely well regarded in the world of ethical business and their assessments are thorough enough to give an excellent understanding of an organisation’s social impact. However, the challenge comes in finding B Corporations that are publicly quoted. For many B Corporations, the only investment opportunity is via private finance, venture capital, etc. For others, they are subsidiaries of larger corporations that may not be as ethical – for example, Innocent Drinks is a B Corporation but it’s parent company, Coca Cola, is not.
With an overwhelming amount of information available and yet no clear path, tailored and personal advice is invaluable when starting your ethical investment journey. The idea behind impact investing is to ensure that your money goes as far as it possibly can.
To help that happen, make sure you take the time to work with a professional ESG advisor and discuss which areas mean the most to you and where you are looking to see significant results. With personalised advice, you can feel secure knowing that you are investing in an ethical way without compromising your ROI and be a part of the shift that society is making towards purpose-led financial portfolios.