Investing in Environmental, Social, and Governance (ESG) companies is currently at the forefront of business news. Many brokerage firms are offering products with the ESG criteria. In addition, mutual funds and robo-advisors are also offering ESG products.
Some companies are claiming to use ESG practices. However, defining precisely the criteria rating is often ambiguous. What is ESG, how is it rated, and does it help stockholders?
ESG Sets Standards for a Company’s Behavior
Environmental, Social, and Governance criteria have been around since the 1960s, but recently they are being increasingly held up as a way to influence companies to follow certain standards.
ESG is a set of non-financial standards for a corporation’s behavior. This behavior has three legs. The first is the environmental criteria: for example, what measures is the company using to address climate change.
The second criterion of ESG is social. This encompasses managing relationships with customers, employees, communities, and suppliers.
And finally, there is governance. This refers to the corporation’s leadership, executive salaries, and shareholder rights.
How ESG Ratings are Determined
There is no standardized way to determine if a company is following ESG standards. Indeed, a set criterion of standards has not been determined. Ratings are based on perceptions, not reality.
Over 150 companies have stepped forward to offer ratings. Most of them have their own criteria and ratings for ESG.
The…
