Sustainable Investing: Evaluating Companies for ESG Factors

When analyzing a potential investment, it's important to research the company's history.


stands for Environmental, Social and Governance. Investors are increasingly using these non-financial factors as part of their analysis process to identify significant risks and opportunities for growth. ESG metrics are not usually part of mandatory financial reporting, although companies are increasingly publishing information in their annual report or in an independent sustainability report.

Many institutions, such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI) and the Working Group on Climate-Related Financial Disclosure (TCFD), are working to develop standards and define materiality to facilitate the incorporation of these factors into the investment process. Are you interested in investing based on your personal principles? If so, you might want to consider sustainable investing. Integrating sustainable environmental, social and governance (ESG) investment components into your research could improve your ability to align your investments with your principles. Although this investment approach is not new, its definition and objectives have evolved over the years, from avoiding certain investments (so-called sinful actions, such as tobacco, firearms, alcohol and casinos) to adopting a more holistic approach, based on ESG factors.

A large and growing number of mutual funds and ETFs with a socially responsible investment mandate are now available, in addition to individual stocks of companies that could be considered candidates to invest in ESG. Another common term for the process of creating a sustainable investment portfolio is socially responsible investment, or SRI. ETFs focused on ESG factors are mandatory. Look for ETFs with strategies that can meet your sustainable investment objectives, such as strong employee relationships, efficient use of natural resources, or gender diversity.

For investment professionals, a key motivation when considering environmental, social and governance (ESG) issues as part of their financial analysis is to better understand the companies in which they invest. In addition, the classification of a sustainable investment strategy has changed over time (think of “stocks without stocks versus ESG factors”), which has made measurement and comparisons somewhat complicated. The more the world of sustainable investment has grown, the more those terms (among others) have been used interchangeably. Here's a more detailed analysis of what sustainable investment entails, along with some opportunities to consider.

This can be achieved by further researching each individual fund to help determine if they match their sustainable investment objectives. Stay informed about recent trends in ESG and sustainable investment with these practical examples for institutional asset owners. The ESG score of an investment measures the sustainability of an investment in those specific categories. For example, if you are primarily interested in green energy investments and would like to invest in an ETF or investment fund, consider the objectives of the fund and evaluate the fund's shares to see if the components actually meet your definition of ESG investment.