ESG – Environmental
Environmental criteria include such things as a company’s use of renewable energy sources, its waste management program, how it handles potential problems of air or water pollution arising from its operations, deforestation issues (if applicable), and the company’s attitude and actions in relation to climate change issues.
Other possible environmental issues include raw material sourcing (e.g., does the company use fair trade suppliers and organic ingredients?) and whether a company follows biodiversity practices on land it owns or controls.
ESG – Social
Social criteria cover an extremely wide range of potential issues. There are many separate social aspects of ESG, but all of them are essentially about social relationships. One of the key relationships for a company, from the point of view of many socially responsible investors, is the company’s relationship with its employees. Following is a brief rundown of just some of the issues that may be considered when examining how a company handles its social relationships:
Is an employee’s pay fair, or perhaps even generous, when compared to comparable jobs or to similar positions throughout the industry? What type of retirement plans are employees offered? Does the company contribute to the employee retirement plans?
In addition to basic wages or salary, what benefits or perks are employees provided with? With ESG-concerned investors, it can make a big difference in the evaluation of your company if, for example, you do things such as providing a free, very lavish buffet lunch for all employees every Friday – or provide other types of benefits that aren’t exactly commonly found at all workplaces, such as an on-site fitness center. Workplace policies regarding diversity, inclusion, and prevention of sexual harassment are also factors that are frequently considered.
Employee training and education programs; for example, does your company provide financial support for continuing or higher education and/or flexible working hours for employees pursuing further education; what opportunities exist for employees to be trained in new job skills at the company, that will qualify them for higher-paying positions?
What level of employee engagement with management is there? How much input do employees have in determining operational procedures within their respective departments? The level of employee turnover.
What’s the company’s mission statement? Is it socially relevant and beneficial to society? Does the company take a public or political stance on human rights issues? Does it donate money to charitable causes?
How well are customer relationships managed? Does the company engage with customers on social media? How responsive and efficient is the customer service department? Does the company have a negative history of consumer protection issues, such as product recalls?
ESG – Governance
Governance in the context of ESG is essentially about how a company is managed by those in the top floor executive offices. How well do executive management and the board of directors attend to the interests of the company’s various stakeholders – employees, shareholders, and customers? Does the company give back to the community where it is located?
Financial and accounting transparency and full and honest financial reporting are often considered key elements of good corporate governance. Also of importance are board members who are acting in a genuine fiduciary relationship with stockholders and being careful to avoid any conflicts of interest with that duty. Are the board members and company executives a diverse and inclusive group?
The issue of executive compensation is a primary focus. Is extra compensation for executives appropriately tied to increasing the long-term value, viability, and profitability of the business?