What Is ESG?

Hand with ESG icon concept.

When it comes to investing your hard-earned capital, historically, investors have almost always put their financials first. How much revenue and profit does the company generate? How many employees does it have? What are the efficiencies and inefficiencies in their daily operations? These are all questions investors ask before parting with their money — with the goal of making a sound investment that thrives and generates a healthy return on their investment over time. 

What if there was a better way of analyzing investment decisions and bringing climate change, environmental impact, and social impact into the mix? Enter ESG investing. 

In this guide, we’ll walk you through ESG investing, what it is, and how it can impact startups in the foreseeable future.

What Does ESG Stand For?

ESG stands for environmental, social, and governance, which is a new methodology for analyzing investments that focus not only on the financial side but also on how a certain company impacts the environment and society as a whole. 

For example, even if a company has excellent financials, is producing significant profit, and looks great on paper – an ESG investor will be able to quickly determine whether or not that company is profiting at the expense of the environment.

ESG Factors to Consider

Due to the interconnectedness of our world today, ESG factors are often linked together. Whenever a change occurs in one factor, the likelihood of it influencing another factor is very high. 

Some of the factors you have to consider when it comes to ESG investing include environmental, social, and governance. In the next few sections, we’ll dive into each ESG factor in more detail and explain how it can impact a business at a fundamental level.

Environmental Factor

The environmental factor of ESG investing is focused on the conservation of the natural world and ensuring that nature is preserved and protected from humans for the coming centuries and millennia. 

Some of the specific environmental ESG details that are looked into include:

  • Boosting energy efficiency
  • Waste management 
  • Carbon emissions and climate change
  • Biodiversity
  • Deforestation
  • Air pollution and water pollution
  • Scarcity of water

Social Factor

The social factor of ESG focuses on building relationships and operating in a way that’s considerate towards human beings as a whole. 

The social factor within ESG relies primarily upon:

  • Improving labor standards
  • Gender and diversity goals 
  • Privacy and data protection
  • Customer support and satisfaction
  • Human rights
  • Getting involved in local communities

Governance Factor

Last but not least, the governance factor of ESG was built to establish standards for running companies around the world. 

When it comes to ESG and governance, some factors you should be on the lookout for include: 

  • Continuous lobbying efforts
  • Whistleblower schemes 
  • Political contributions
  • Corruption and bribery
  • Compensation for executives

In essence, ESG is giving proactive investors a chance at detecting and weeding out any issues with leadership, corruption, and bribery, helping them invest only in companies with proper governance.

How Does ESG Investing Work?

ESG investing works by analyzing the environmental impacts, social impacts, and governance within a company and then using methods such as the “ESG Score” to give each analyzed company a rank. 

Once companies have been ranked on each ESG factor, this information is provided to investors, who can then determine whether or not they are willing to invest in a company based on how it performs in each area. 

ESG is also a vital measure of a company’s health, competitive success, and long-term performance. Every ESG factor has the potential to impact profitability and stability over time.

How to Calculate an ESG Score

An ESG score is a way to numerically measure and quantify how an organization is performing with with environmental, social, and governance factors. 

Calculating an ESG score that’s objective has proven to be rather difficult over the years, with many scores being derived from data that companies have voluntarily self-disclosed. 

ESG scores are calculated by organizations using their own formulas and methodologies to quantify and measure how well they are meeting ESG metrics. Once the score is calculated for multiple companies, investors can compare and contrast this data to make investment decisions.

How Can We Make ESG Scoring More Reliable?

The most reliable ESG scoring methodology would involve a real-time analysis of millions of data points about a particular company that is publicly available. These data points would include social media content, online news, broadcast news, publicly printed information, regulatory disclosures, and more. 

ESG and Sustainability Practices

Since ESG first began to be used as a set of criteria for analyzing companies and guiding investment decisions, many organizations have begun to shift their focus towards sustainability and how they impact the environment

ESG principles are helping guide organizations towards more sustainable practices and motivating them to consciously think and consider how they can change their operations with the environment in mind. 

When making business decisions, companies can no longer overlook every other factor in favor of pure profitability. This is an excellent development for future sustainability and for the protection of our environment.

Why Is ESG Important for My Startup?

ESG is an important factor for startups to consider, especially at the very beginning when they first enter their market or respective industry. 

As time goes on and ESG factors become more prevalent in how investors gauge their investment opportunities, more and more companies will have to show how they’re operating on an environmental, social, and governance level. 

If your startup can begin operating with an ESG mindset from the very beginning, you’ll be significantly further ahead compared to most other businesses within your industry. Additionally, you’ll save yourself time and money, as you won’t have to worry about adjusting your operations in the future.

Frequently Asked Questions

What is the difference between sustainability and ESG?

One of the primary differences between sustainability and ESG is the fact that ESG sets specific criteria about governance, social issues, and the environment, while sustainability looks purely at a company’s operations concerning the environment. With ESG, the investor aims to learn about the company in-depth and keep the shareholders, stakeholders, employees, the board, and CEO happy.

Who benefits from ESG?

Both companies, investors, and the planet as a whole can experience benefits from ESG. For workers, the peace of mind that comes with knowing that a company is acting in a way that benefits the world across multiple areas is a significant benefit. Additionally, when companies are operating with ESG criteria in mind, their local communities, environments, and social spheres also benefit. 

Do investors care about ESG?

Yes, many investors care about ESG, especially as companies continue to shift to more sustainable operations across all aspects of business in the coming years and decades. By analyzing a company’s ESG score, investors can determine whether or not a particular company is investable based on its values, ideals, and goals.

What are ESG companies?

ESG companies are organizations that focus on how they impact the environment, the messages they are conveying within their social spheres, and how they are governed from within. When a company works towards improving its operations on each of these levels, they are considered an ESG company.