Socially Responsible Investing: What is ESG?

By Siri Yellamraju, Spring 2016 Student Intern

There are two major strategies involved in SRIs. The first strategy is incorporating Environmental, Community and other societal and corporate governance (ESG) criteria in making portfolios and investment analysis. ESG integration has jumped from $614 billion in 2012 to $4.7 trillion in 2014. ESG criteria is a set of standards that a corporation uses that SRI investors can use to screen investments. The environmental criteria analysis the measures the steps a company takes to proactively protect the environment and comply with existing regulations. The social criteria covers how a company manages labor relationships, relationships with suppliers, customers and communities it is tied to. Governance deals with a company’s directors, leaders, executive pay, audits and shareholder rights. Governance also includes compliance with accounting standards, properly following conflict of interest procedures and functioning in the best interest of the company.

ESG criteria is extremely subjective, and as said in a previous blog post, is not reported on the company’s financial statements. There are very few metrics and many of these factors are self-reported by the company. The ESG criteria analyze the impact the fund has on the environment, market and community. The UN Principles for Responsible Investment details best practices in ESG Investing. It has been signed by nearly 700 investment managers and over 250 asset owners in the world. This includes big names like Blackrock, Fidelity, KKR and CALPERS.

The six principles are:

Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes

Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices

Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest

Principle 4: We will promote acceptance and implementation of the Principles within the investment industry

Principle 5: We will work together to enhance our effectiveness in implementing the Principles

Principle 6: We will each report on our activities and progress towards implementing the Principles