Thursday, December 23, 2010

ESG

ESG stands for Environment, Social, and Governance. It is a framework for considering the non-financial aspects that impact on investing. Some managers will consider ESG factors in arriving at valuations for stocks that they consider adding to the portfolio. Other managers may not consider it at all, particularly those with a quantitative focus. Meanwhile there are also some niche fund managers which use ESG screens to exclude certain companies from consideration e.g. companies that are involved in tobacco, alcohol, nuclear activity, child labour, war, etc. And within that specialty there are also a selection of managers which positively screen, i.e. they seek out companies that exhibit best practice in ESG, and companies that are making a positive difference in the world. There is some controversy in socially responsible investing, as a potential conflict may arise between generating optimal returns for investors versus optimal outcomes for society. However in the long run, companies that are engaged in extremely poor standards of ESG, will likely bear an economic cost at some point e.g. a company that pollutes excessively will likely eventually face public backlash and/or fines and remediation costs.

Synonyms:  Socially responsible investing, Green funds, Sustainability funds, Corporate social responsibility

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