ESG stands for environmental, social and governance criteria for the companies in which environmental sets criteria for the companies to use sustainable products to prevent nature from any harm, Social criteria examine how it manages its relation with employees and other staﬀ whereas governance deals with companies leadership ,audits ,internal control and shareholder rights.
Nowadays ,young investors has started investing their money where their value are, brokerage ﬁrms and mutual funds have begun to oﬀer exchange trade funds. According to recent reports of US SIF foundation about 11.6 trillion dollar assets are chosen according to ESG criteria.
HOW ESG CRITERIA WORK? To assess a company based on ESG criteria, a broad range of behavior is observed and based on this actions are taken to ensure proper law and order.
Environment criteria includes company’s waste, pollution and natural resource conservation. This is done to keep in check the environmental risk that a company may face in future. For eg- problems related to its ownership of contaminated land, its management of toxic emissions and its disposal of hazardous waste.
Social criteria look at the company’s relations like, is the company ensuring safety and better health of its employees? Does it work with suppliers which hold the same values as it claims to hold? Does the company donates a percentage of its to local community that encourage its employees to volunteer to work there.
Governance ensure that the company uses transparent and accurate accounting methods and stockholders are given opportunity to vote for an important issue. It also assures that the company avoid conﬂict of interest in their choice of board members, and they don’t use unduly favorable treatment and, of course don’t engage in any illegal practice.
IS SUSTAINABLE FINANCE GETTING THE IMPORTANCE IT NEEDS? The requirement of sustainable ﬁnance are not only due to political factors and policy makers but there is a huge pressure from the rating industries and investors to implement adequate measures for sustainable management and behavior. Some business also target sustainability as their major base pillar.
Sustainable ﬁnance is not only looked as an opportunity of introduction of new products and improving reputation of the brand. Also, the long term risk can br avoided by keeping an eye on sustainability factor.
Recently, many companies have recognized that the sustainable ﬁnance has a practical importance beyond any ethical concerns. By following these practices companies could avoid any risk factor like BP’s 2010 oil spill and Volkswagen scandal. Both of these cases resulted in billions of losses to respective companies.