Environmental, social and governance (ESG) considerations are integrated into the policies and principles that govern our business and reflect our commitment to inclusive, sustainable growth. At Northbound Wealth Management, we get to know you and your specific criteria regarding risk tolerance, goals, and objectives. Since everyone is unquie, we incorporate and prioritize your specific values into your customized investment strategy as it relates to ESG.
Around 89 percent of investors factored ESG issues into their investment strategies in 2022, according to research by Capital Group. "Capital Group ESG Global Study 2022."
This means that it is no longer a niche market or passing fad. Moreover, clients today are demanding more and better ESG information and services.
The three pillars of ESG – environmental, social, and governance – are interconnected aspects of a company's operations and performance and play a vital role in determining a company's overall sustainability. While each component is important in its own right, they are also interdependent and can significantly influence one another. Your business, like every business, is deeply intertwined with environmental, social, and governance (ESG) concerns. Your decisions as a consumer and investor in this global economy is literally voting with your money. Let’s briefly consider the individual elements of ESG:
The finance sector has an important role to play in helping to address some of the most pressing environmental and social challenges of our time, primarily by supporting its clients and providing targeted capital to help scale solutions. We are leveraging our expertise, capital, data and resources to advance inclusive growth, promote sustainable development, and support the transition to a low-carbon economy. ESG matters are an important consideration in how we do business, including how we develop our products and services, serve our customers, support our employees and help lift our communities.
A company with an environmental focus factors their impact on the environment. Such a company might aim to reduce their pollution output, energy consumption, or factor in the risks of climate change on the company and industry.
By addressing the “E” in ESG effectively, companies can create a strong foundation for achieving success in the other two components as well.
The “E” in ESG, environmental factors, is often considered the key to a successful ESG program because it addresses the impact of a company's operations on the natural environment and how the company manages its environmental risks and opportunities. The escalating effects of climate change, pollution, and resource depletion have led to increased awareness of the importance of environmental sustainability.
Optimizing environmental management and practices can help companies mitigate risks associated with climate change, reduce their environmental footprint, and align with the global movement towards a low-carbon economy. Moreover, strong environmental performance can contribute to better financial results, as it can help companies reduce costs through improved resource efficiency, minimize regulatory risks, attract environmentally conscious investors and customers, and help create long-term value for stakeholders.
There is a broad range of environmental initiatives and practical steps that can help companies in the U.S. and European Union (EU) improve their overall ESG performance and contribute more broadly to a sustainable, resilient, and equitable future.
Compliance With Environmental Laws and Regulations
Ensuring strict adherence to environmental laws and regulations helps companies avoid legal penalties, maintain a strong reputation, and demonstrate their commitment to responsible environmental stewardship. Potential steps to facilitate compliance include:
Enhancing energy efficiency can significantly reduce a company's energy consumption and associated costs, as well as decrease greenhouse gas emissions. In March, the EU reached an agreement to cut final energy consumption across all member states by 11.7 percent by 2030. In the U.S., the administration’s most recent budget proposal builds on the unprecedented financial incentives for improving energy efficiency provided by the Inflation Reduction Act of 2022 (IRA).
Renewable Energy Transitioning to renewable energy sources helps companies reduce their dependence on fossil fuels, decrease greenhouse gas emissions, and demonstrate environmental leadership. The European Parliament and the 27 EU member states agreed in March to raise the 2030 renewable target to 42.5 percent of total energy consumption.
In the U.S., the IRA has given a strong boost to development and use of renewables, particularly in underserved communities. In furtherance of this renewables initiative, the federal government is required to utilize 100 percent carbon pollution-free electricity by 2030 to power federal facilities. Companies can transition to renewable energy sources, such as solar, wind, and hydropower, to reduce their dependence on fossil fuels and decrease greenhouse gas emissions. More specifically, they can:
Effective waste management can minimize the environmental impact of a company's operations, conserve resources, and help meet sustainability goals. Companies can adopt waste reduction strategies, including the following, to minimize the volume of waste sent to landfills and reduce the environmental impact of their operations:
Conserving water is crucial in the face of increasing water scarcity worldwide, and can lead to operational cost savings and reduced environmental impact. In the U.S., the Department of Agriculture and Department of the Interior have been instrumental in efforts to combat water shortages. The Environmental Protection Agency (EPA) has implemented water management plans and best practices at its own facilities to lead by example.
The EU Water Protection Framework establishes a legal framework to protect and restore clean water in the EU and to ensure its long-term sustainable use. The European Environment Agency recognizes the water scarcity conditions in Europe, and the need for additional effort to ensure sustainable water use. Companies can employ water-saving measures similar to those utilized by the EPA:
Sustainable sourcing ensures that companies procure materials and resources from environmentally responsible suppliers, promoting the adoption of sustainable practices throughout the supply chain. In the U.S., the EPA is leading again through its commitment to purchasing recycled, biobased and other sustainable products throughout its operations. The EU has implemented similar green public procurement practices, and is working on a Corporate Sustainability Due Diligence Directive that will impose similar obligations on EU companies and non-EU companies operating within the EU. Companies looking to prioritize procurement of materials and resources from suppliers with sustainable practices can start with the following:
Actively working to reduce greenhouse gas emissions demonstrates a company's commitment to mitigating climate change and helps fulfill regulatory requirements and stakeholder expectations. President Biden has set a target to reduce emissions 50-52 percent below 2005 levels by 2030 and achieve net-zero emissions economy-wide by no later than 2050. The European Climate Law adopted by the EU as part of the European Green Deal raised the EU’s target for reducing net greenhouse gas emissions to at least 55 percent by 2030 and requires climate neutrality by 2050. Steps companies can take to reduce their greenhouse gas emissions include:
Biodiversity and Habitat Protection
Integrating biodiversity considerations into business operations helps protect ecosystems and species, while also reducing the risk of negative impacts on a company's reputation and regulatory compliance. The EU biodiversity strategy for 2030 (adopted in May 2020) aims to further strengthen the protection of marine ecosystems. The U.S. has implemented a variety of initiatives to combat the global biodiversity crisis, including the 10-year America the Beautiful program, launched in 2020, to support local and voluntary efforts to conserve, connect, and restore 30 percent of our lands and waters by 2030. Ways that companies can integrate biodiversity considerations into their operations include:
Environmental Risk Management
Identifying and addressing environmental risks helps companies proactively manage their impact on the environment and maintain a strong reputation among stakeholders. Companies can conduct environmental risk assessments to identify, assess, and mitigate potential environmental risks associated with their operations, products, and services. This can include assessing the potential impact of climate change on their business and developing adaptation and mitigation strategies, such as:
Environmental Reporting and Disclosure
Companies can enhance transparency by regularly reporting on their environmental performance, including progress toward sustainability goals, environmental risks, and opportunities. This can help investors and stakeholders better understand a company's commitment to ESG principles. Approaches to voluntary and required disclosures may include:
Green Product Design and Innovation
Focusing on environmentally friendly product design and innovation can help companies meet evolving customer demands, differentiate themselves in the market, and reduce the environmental impact of their products and services. A Green Deal Industrial Plan was recently proposed in the EU to facilitate the technological development, manufacturing production and installation of net-zero products and energy supply in the next decade. This plan is in response to the U.S. IRA, which provides substantial financial support for a variety of renewables and green products. In parallel with these initiatives, the EU and U.S. are taking strong action to prevent greenwashing and assure that consumers receive accurate and verifiable information about green products. Some of the initial steps for those looking to benefit from green product design and innovation include:
Circular Economy Practices
Embracing a circular economy approach that moves away from linear production and consumption – in which things are used for a short time and thrown away after use – toward a more circular process that involves refurbishing, repurposing, redistributing and other strategies that extend the lifetime of products is more environmentally responsible. Circularity enables companies to reduce resource consumption and waste generation while creating new business opportunities and driving innovation.
The EU’s Circular Economy Action Plan is a key part of the framework for achieving its sustainability objectives. Circular economy innovation has become a focal point of the current U.S. administration, exemplified by the Draft National Strategy to Prevent Plastic Pollution issued May 1, 2023, that builds on the EPA’s National Recycling Strategy to reduce, reuse, collect, and capture plastic waste. Steps companies can take to help move toward a circular economy include:
The “E” in ESG serves as a cornerstone for successful ESG performance as it directly influences a company's social and governance aspects. As the global economy transitions toward a greener, more sustainable and low-carbon future, companies with robust environmental practices will be better positioned to adapt to new regulations, market dynamics, and stakeholder expectations. Implementing responsible environmental practices can help companies capitalize on emerging opportunities in the burgeoning green economy.
At the same time, it is essential to recognize that the environmental, social and governance factors are interrelated. A comprehensive approach to ESG allows companies to capitalize on the synergies between the pillars, unlocking opportunities for innovation, risk mitigation, and sustainable growth.
Companies with a social component heavily factor the company's connections with people, society and the population as a whole. These companies may incorporate particular faith-based issues, human rights, diversity, or health and safety concerns in their ethos. Social factors may extend to the company's relationships with other businesses and even throughout its supply chain.
Environmental, social, and governance (ESG) criteria have become increasingly important in assessing a company's ethical and sustainability performance. While the environmental and governance aspects often receive the most attention, it is crucial not to overlook the “S,” or social, component – a company's impact on society and its stakeholders.
Historically, initiatives, policies and practices that companies can implement to improve their “E,” “S,” and “G” performance intersect and overlap at various points. However, the importance of the “S” in ESG has increased in recent years for a number of reasons:
Changing consumer attitudes: Consumers are becoming more conscious of the impact companies have on society and the environment, and are increasingly looking for products and services from companies that align with their values.
Greater attention to social issues: Issues such as income inequality and human rights have received greater public attention in recent years, and are now seen as critical factors in determining a company's long-term sustainability.
Regulatory pressure: Governments around the world are introducing new regulations aimed at promoting responsible corporate behavior, including rules related to labor practices, human rights, and environmental protection.
Investor demand: Investors are becoming more interested in ESG factors and are increasingly using ESG analysis to make investment decisions. Many investors see companies that score well on ESG factors as being more sustainable and less likely to face reputational, regulatory, or financial risks.
The role of ESG in financial performance: Studies have shown that companies with strong ESG practices, including strong social ESG practices, tend to have better financial performance and lower risk over the long-term.
In short, the increasing importance of the “S” in ESG reflects a growing recognition that a company's impact on society is a critical factor in its long-term success. Indeed, successful environmental and governance strategies are dependent on implementing an effective social sustainability strategy.The following bullet points discusses the kinds of practices that companies can implement to potentially improve their social performance and contribute positively to the ESG landscape.
Diversity, Equity and Inclusion
Promoting diversity, equity and inclusion (DEI) in the workplace drives innovation and creativity, leading to better decision-making and problem-solving. Companies can set diversity hiring goals and create targeted recruitment strategies to reach a wider pool of candidates, ensuring they have a more diverse and inclusive workforce. Employers can further promote DEI by creating an accessible and inclusive work environment for individuals with disabilities.
Companies can implement policies and practices that ensure their workspaces are accessible, provide reasonable accommodations, and offer targeted training programs to raise awareness and foster a culture of inclusion. Company leadership can also create employee resource groups focused on different dimensions of diversity, which can help foster an inclusive culture and provide networking opportunities for underrepresented employees. Such actions, in turn, result in better overall ESG performance by aligning the company's values with societal expectations, while also attracting a broader range of investors interested in socially responsible practices.
Fair Labor Practices
Companies can establish and maintain policies that promote fair wages, benefits, and safe working conditions. For example, they can conduct regular wage assessments to ensure their compensation is competitive within the industry and provide adequate safety training for employees to minimize workplace accidents. By implementing such practices, employers can create a supportive and motivated workforce, leading to increased productivity and improved ESG performance. Implementing fair labor practices also signals a commitment to human rights and ethical business practices, which are essential for strong ESG ratings.
Prioritizing employee well-being can lead to increased employee satisfaction, reduced turnover rates, and higher productivity. To support their employees’ physical and mental health, companies can establish comprehensive employee wellness programs that address and encourage various aspects of well-being. Such programs may include fitness classes, stress reduction workshops, parental and family support programs, and mental health resources.
By investing in employee well-being, companies demonstrate their commitment to the welfare of their employees and the social aspects of sustainability. These efforts not only contribute to improved ESG performance but also create a supportive work environment that attracts and retains top talent, ultimately benefiting the organization's long-term success.
Community Investment and Volunteerism
Investing in local communities fosters goodwill and builds positive relationships with stakeholders, which can enhance a company's reputation and contribute to a company's overall ESG performance by demonstrating a commitment to social responsibility and community engagement. Companies can collaborate with local nonprofits and organizations to identify opportunities for employee involvement, ensuring that their efforts align with both the company's values and the needs of the community. This can also facilitate stronger relationships with stakeholders, as investors increasingly prioritize ESG criteria when making investment decisions.
Supply Chain Responsibility
A responsible and ethical supply chain demonstrates a commitment to sustainability and social responsibility, which can contribute to improved ESG performance. Companies can collaborate with their suppliers to develop and enforce codes of conduct that outline expectations for labor rights, environmental stewardship, and responsible sourcing practices. Companies can also provide training or resources to help suppliers improve their own ESG performance, thereby strengthening the entire supply.
By prioritizing supply chain responsibility, companies can mitigate risks associated with labor and environmental violations, leading to stronger long-term financial performance and increased investor confidence.
Combatting Forced Labor and Human Trafficking
Preventing forced labor and human trafficking within a company's operations and supply chains helps improve overall ESG performance by demonstrating a commitment to human rights and ethical business practices. Companies can establish and enforce policies that require suppliers to provide evidence of compliance with local and international labor laws.
In addition, companies can look to establish strict supplier screening and audit processes to ensure they only work with ethically compliant partners, thereby mitigating risks associated with forced labor and human trafficking, including reputational and legal risks that can negatively impact financial performance and investor relations.
Engaging with stakeholders and soliciting feedback allows companies to better understand the social impact of their operations and address concerns proactively. Companies can adopt a multi-faceted approach to stakeholder engagement that includes various channels for communication and interaction. This may involve conducting surveys, hosting town hall meetings or webinars, forming advisory boards, and engaging with stakeholders through social media platforms.
By employing diverse methods of communication, companies can reach a broader range of stakeholders, including employees, customers, investors, suppliers, and community members. This can lead to improved ESG performance by fostering trust and transparency between the company and its stakeholders, while also ensuring that the company's actions align with societal values and expectations.
Support for Education and Skill Development
Investing in education and skill development programs contributes to a company's overall ESG performance by empowering employees and communities. By investing in their workforce, companies can maintain a competitive edge in the industry and foster a culture of innovation and personal development. Developing a skilled workforce can help drive sustainable growth, while also demonstrating the company's commitment to social responsibility and long-term value creation.
Ethical Marketing and Advertising
Adopting ethical marketing and advertising practices can improve a company's overall ESG performance by promoting transparency and building trust with customers. Companies can prohibit deceptive marketing tactics and create internal guidelines and training programs to ensure that marketing materials meet ethical standards and promote positive social values. In addition to mitigating the risk of greenwashing claims, such programs also signal a commitment to social responsibility and consumer protection, which can attract investors focused on sustainable business practices.
Data Privacy and Security
Protecting customer and employee data is essential for a company's social performance and overall ESG standing. Companies can conduct regular data security audits and invest in robust cybersecurity measures to safeguard sensitive information and maintain the trust of their stakeholders. Employers can also involve and invest their employees by providing training in data protection best practices.
By implementing strong data privacy and security policies, companies can reduce the risk of data breaches and demonstrate their commitment to ethical business practices, which can positively influence investor and customer perceptions.
Prioritizing the “S” in ESG is crucial for companies looking to improve their overall “E” and “G” performance. Implementing the kinds of practices outlined above can help foster a positive work environment, contribute to local communities, facilitate overall sustainability, and align companies’ operations with socially responsible practices. This not only benefits the company's reputation but also promotes long-term positive human impacts.
As ESG continues to gain prominence in the business world, a strong focus on the social aspect will become increasingly important for companies striving to maintain a competitive edge and meet the expectations of investors, employees, consumers and other stakeholders.
The focus on a company's governance refers to the leadership of the company. A company with a stated commitment to ethics and transparency, for example, may fall under the governance component of an ESG. Governance may also include a company's dedication to shareholder rights and the roles of the board of directors.
One of the primary reasons why people ask about ESG investing is because it's become a big investing trend. However, dig a little deeper and ESGs become less like a trend and more like an investing evolution.
Corporate governance is an essential aspect of business that determines how organizations are managed, directed, and controlled. It involves a set of principles, practices, and processes that define the relationships between the company's management, board of directors, shareholders, and other stakeholders. Effective corporate governance is crucial for the long-term sustainability and success of any organization.
In recent years, there has been a growing focus on how companies can improve their governance practices to be more socially and environmentally responsible. Governance initiatives that companies can implement to improve their overall environmental, social and governance (ESG) performance intersect and overlap at various points. They are by no means exclusive. Rather, they are part of the much larger ESG toolbox; the success of these and other ESG practices will – like most other key performance indicators – depend on strong leadership, discipline, good data, and common sense.
Incorporating ESG Factors Into Decision-making
ESG factors have become an important consideration for investors and other company stakeholders. This involves consideration of environmental and social impacts when making decisions, in addition to (not as a replacement for) financial factors.
Regular ESG audits can be undertaken to assess companies’ practices and identify areas for improvement, and to ensure their governance practices are aligned with their ESG goals. Companies that incorporate ESG factors into their decision-making process are better able to identify and manage risks and opportunities related to ESG factors, and more likely to be successful in the long term.
Establishing a Strong and Diverse Board of Directors
A board of directors is responsible for overseeing a company's management, in many cases, providing strategic guidance, and ensuring that the company's operations are aligned with its long-term goals. A strong, independent, and diverse board is essential to provide a range of perspectives and experience to guide the company's decision-making. This includes diversity in terms of gender, race, ethnicity, age, and professional background. A diverse board can bring a range of viewpoints and expertise to the company's decision-making, which can lead to more effective and innovative solutions, and better understanding of the needs and concerns of its stakeholders.
Best practices include establishing clear guidelines for the roles and responsibilities of board members, such as defining the scope of the board's oversight, such as overseeing the company's strategy, risk management, and ESG practices. The board should also be responsible for monitoring the company's impact on the environment, society, and stakeholders, as well as ensuring that the company's operations are aligned with its ESG principles.
Improving Transparency and Accountability
Transparent reporting allows stakeholders to understand a company's ESG performance and identify areas for improvement. This includes reporting on key ESG metrics such as carbon emissions, waste generation, water use, energy consumption, and employee turnover. Companies can facilitate transparency by reporting on their progress toward achieving their ESG goals and commitments. There is a growing emphasis on the potential for AI and blockchain as tools to enhance transparency.
Establishing clear lines of accountability can help companies ensure that their governance practices are aligned with their ESG goals. This includes implementing policies and procedures for decision-making, risk management, and stakeholder engagement. Accountability also involves holding company leaders and managers responsible for their actions and decisions.
Encouraging Stakeholder Engagement
Companies’ engagement with their stakeholders, including customers, employees, suppliers, and communities should be a two-way dialogue, with companies listening and responding to stakeholder feedback. This will involve creating opportunities for stakeholders to provide input and feedback, such as through surveys, focus groups, social media and public consultations.
Engaging and collaborating with stakeholders can help companies gain valuable insights into ESG issues and develop more effective solutions. For example, by engaging with customers, companies can better understand their preferences and expectations related to environmental and social performance. Engaging with employees can identify opportunities to improve working conditions and promote diversity and inclusion. By engaging with suppliers, companies can ensure that their products and services meet environmental and social performance standards. Such collaboration can also help build trust and support among stakeholders, which is essential for long-term success.
Fostering a Culture of Ethics and Integrity
A culture of ethics and integrity refers to a set of values, principles, and practices that guide the behavior of individuals and organizations in a responsible and ethical manner. A code of conduct that outlines the ethical principles is the foundation on which such a culture is built. Such codes generally cover a range of topics, including conflicts of interest, anti-bribery and corruption, data privacy, and human rights; they often are accompanied by programs for training employees and communicating the code to other stakeholders.
Such codes are often augmented by whistleblower policies that allow employees to report any unethical or illegal behavior without fear of retaliation. Best practices for such policies include guidelines for reporting and investigating concerns and protecting the anonymity of the whistleblower.
Fostering a culture of ethics and integrity requires strong leadership and commitment from the top of the organization. Leaders should model ethical behavior and hold themselves and others accountable for ethical conduct.
Prioritizing Employee Well-being and Diversity
Companies prioritize employee well-being by providing a safe and healthy workplace, and offer fair compensation and benefits. This includes ensuring that employees have access to the necessary resources and training to perform their jobs safely, promoting physical and mental health through wellness programs, and providing support for work-life balance.
Diversity and inclusion should be prioritized for hiring practices and training and development opportunities. Companies should also establish clear policies and procedures for preventing discrimination and harassment, and provide employees with resources for reporting and addressing concerns. Companies that prioritize employee well-being and diversity can attract and retain top talent, which can improve productivity and reduce turnover.
Incorporating Sustainability Into Strategy and Operations
Sustainability refers to the responsible management of social, environmental, and economic factors to ensure the long-term health and well-being of people and the planet. Incorporating sustainability into strategy requires consideration of the environmental and social impacts of business operations, products, and services. This includes assessing operations to identify areas for improvement and establishing clear goals and targets for reducing environmental impact, such as reducing greenhouse gas emissions or improving water efficiency.
As part of their sustainability analysis, there is a growing movement by companies to consider the life cycle of their products and services, from production to disposal. This means considering the environmental and social impact of raw materials, manufacturing processes, packaging, transportation, and disposal, and prioritizing the use of sustainable materials and processes. Increasingly, regulators are imposing Extended Producer Responsibility (EPR) obligations beyond the point of sale for different products and waste flows.
Sustainability management systems (SMS) can be implemented to help companies identify, monitor, and manage their environmental and social impacts. Companies can use an SMS to establish policies, procedures, and practices that support sustainability goals. An SMS typically consists of four components: planning, implementation, monitoring, and review. By identifying sustainability risks and opportunities, companies can develop more effective strategies to manage those risks and capitalize on opportunities.
Emerging best practices include establishing a sustainability committee or task force to oversee sustainability efforts and ensuring that sustainability considerations are integrated into all aspects of the company's operations.
Prioritizing Supply Chain Sustainability
A company's supply chain can have a significant impact on the environment, society, and stakeholders. By prioritizing supply chain sustainability, companies can reduce their environmental impact, improve conditions for workers, and support local communities.
Some ways companies can prioritize supply chain sustainability include incorporating clear guidelines for suppliers, such as sustainability criteria for raw materials and products and feasible goals to reduce emissions. Companies can also establish mechanisms for suppliers to report sustainability data and progress and implement programs to monitor supplier compliance. As regulatory disclosure requirements increasingly extend to supply chains, companies are collaborating with suppliers to identify areas for improvement and support them in implementing sustainable practices. This can include offering training and capacity-building programs, providing technical assistance, and incentivizing sustainability performance through procurement contracts.
Investing in Renewable Energy and Energy Efficiency
Investing in renewable energy involves transitioning to clean energy sources, such as solar, wind, and hydropower. This can help companies reduce their greenhouse gas emissions and support the transition to a low-carbon economy. Companies can invest in renewable energy by installing renewable energy systems on their own facilities, purchasing renewable energy from third-party providers, or participating in renewable energy programs, such as green power purchasing programs.
Investing in energy efficiency involves reducing energy consumption and waste through the implementation of energy-efficient practices and technologies. This can help reduce costs associated with energy consumption and waste disposal. Examples include energy-efficient lighting, insulation, and HVAC systems, as well as the implementation of energy management systems and employee education and training programs. Companies can also improve operational efficiency and reduce waste by implementing energy management systems and employee education and training programs.
Investing in renewable energy and energy efficiency can help lower energy costs, reduce carbon footprints, and improve operational efficiency.
Aligning Executive Compensation With ESG Performance
Traditionally, executive compensation structures have focused on short-term financial metrics, such as earnings per share and quarterly revenues. However, in recent years there has been strong stakeholder pressure to prioritize companies’ long-term sustainability and performance. As a result, there has been a shift toward aligning executive compensation with ESG performance and incentivizing executives to prioritize ESG factors and hold them accountable for achieving ESG goals.
To achieve this alignment, companies can establish clear, relevant, and meaningful metrics for measuring ESG performance, such as greenhouse gas emissions reduction targets, diversity and inclusion goals, or community impact goals. Companies can then tie executive compensation to achieving these metrics, such as by linking executive bonuses or stock options to ESG performance.
Moreover, aligning executive compensation with ESG performance can help companies comply with sustainability regulations and standards, such as the United Nations Sustainable Development Goals (SDGs), the Global Reporting Initiative (GRI) standards, and the forthcoming International Standards Sustainability Board (ISSB) sustainability disclosure standards. Additionally, companies can use executive compensation as a tool to drive cultural change and build a sustainable business culture that prioritizes ESG factors.
Governance, which has always been central to good business management, has historically adapted to meet changing societal norms. In recent years, with the growing attention on social and environmental responsibilities, governance – the G in ESG - has evolved apace to prioritize, implement, and provide oversight for developing E and S business practices. The need for governance to continue to adapt will accelerate further as ESG disclosure and reporting requirements continue to transition worldwide from voluntary to mandatory.
This evolving landscape underscores the importance for companies to continually review and update their governance policies, practices and procedures to address these social and environmental challenges by:
By implementing some of these (and other) governance initiatives, companies can move toward alignment with the increasing ESG expectations and demands of stakeholders, which should also enhance companies long-term prospects for success, resilience, and sustainability.
An ESG score is an objective measurement or evaluation of a given company, fund, or security’s performance with respect to Environmental, Social, and Governance (ESG) issues. Specific evaluation criteria vary between the different rating platforms that issue ESG scores; however, they all fall within one (or more) of the E, S, or G categories.
ESG scoring systems tend to be either industry-specific or industry-agnostic. Industry-specific scoring systems assess issues that have been deemed material to the industry at large. Industry-agnostic ESG scores tend to incorporate widely accepted factors that are meaningful across industries – issues like climate change, diversity, equity and inclusion (DEI), and human rights.
ESG rating platforms determine a weighting for each measurement criterion; then, they assess an organization’s performance against each criterion. An organization’s final ESG score is typically a sum-product of the criteria ratings and the (proprietary) criteria weightings.
- An ESG score is an evaluation of an organization’s performance against various sustainability metrics (related to either environmental, social, or governance issues).
- ESG scores are generated by rating platforms where analysts evaluate corporate disclosures, conduct management interviews, and review publicly available information about an organization to provide an objective rating of the organization’s performance.
- Scores are used differently by different stakeholders (i.e., investors vs. employees), and rating platforms have evolved to reflect this variety of use cases.
Northbound Wealth employs widely accepted and standardized ranking analytics in their process when selecting ESG investment options for clients.
In theory, the thinking behind investing in an ESG is simple. An investor shouldn't have to sacrifice moral principles to make money. Lining up personal morals with investment choices is referred to as investing with a conscience. But, in the end, ESG investing is vital for a changing world.
ESG investing instruments allow investors to connect with companies that look toward the future. These companies must think outside the box to mitigate future risks and foster sustainability, making them less likely to remain stagnant.
Companies who truly integrate ESG policies into their business are also more likely to voluntarily report ESG metrics and goals via annual reports or sustainability reports. In short, ESG companies may have greater accountability to their stakeholders and shareholders.
The ultimate question is whether ESG stocks are competitive. The answer is yes, and they are inherently so. Companies that adapt to changing socio-economic and environmental conditions are more likely to spot opportunities for growth and identify challenges. They understand that the world is changing quickly, and ESG stocks have the capacity to pivot in the right direction.
Many investment firms currently incorporate ESG evaluations into their risk assessments for portfolios. Both individual and institutional investors are choosing to invest in companies that have ESG policies, with room for demand, thus increasing their competitive value. Access to capital will increase for companies with solid ESG policies.
Along with competitiveness, ESG investments have even more benefits to consider. Fresh talent, for example, gravitates toward companies with ESG policies. Millennials typically choose companies that align with their morals, therefore they tend to choose ESG businesses. What's more, millennials who are passionate about their work are more likely to remain loyal to the company. This pool of new talent adds to the long-term sustainability of a company.
ESG investing also makes for a stronger company and a more solid investment. Values-based investors are more apt to avoid investments that simply flip stock. Rather, they see well into the future and understand that change takes time. ESG investing is projected to grow in popularity in the next decade. Let Northbound Wealth Management help you determine if ESG investing is right for your portfolio.
ESG investing is not a substitute for holistic financial planning. Our first priority is helping you take care of yourself and your family. We want to learn more about your personal situation, identify your dreams and goals, and understand your tolerance for risk.
It is important to consider your overall financial situation, needs and objectives when designing an ESG investment strategy. You should also review your portfolio regularly and adjust it as needed to reflect any changes in their circumstances or preferences.
Long-term relationships that encourage open and honest communication have been the cornerstone of Northbound Wealth's foundation of success.
Is ESG Investing Right for Everyone?
The next step is to assess whether ESG investing is right for you and your family. ESG investing is not a one-size-fits-all approach and might not be appropriate for everybody. Some people may care more about certain ESG issues than others, or have different views on what constitutes a positive or negative impact. For example, some people may favor renewable energy over fossil fuels, while others may prefer nuclear power over both.
ESG investing requires specific research and due diligence, and not all ESG investments are created equal. There are different ways to measure and compare ESG metrics and performance across companies and industries. Several financial companies today score and rank companies based on their ESG performance, but each rating company has a different approach to scoring. Be sure to use evaluations that align with your goals.
Here are some potential concerns or drawbacks to consider when discussing ESG investing:
Lack of standardized reporting and metrics: One major concern surrounding ESG investing is the absence of universally accepted reporting standards and metrics. This lack of standardization can make it difficult for investors to compare companies' ESG performance and make informed decisions.
ESG investing is subject to regulatory changes: As governments and international organizations work towards establishing more standardized ESG reporting and disclosure requirements. Investors and financial advisors need to stay informed about these changes to ensure compliance and adapt their investment strategies accordingly.
Greenwashing: Some companies might engage in "greenwashing," which refers to the practice of overstating their ESG efforts in order to appear more environmentally or socially responsible than they truly are. This can mislead investors and undermine the credibility of ESG investing. Indeed, recent reports about companies publicly embracing ESG as a cover for poor business performance or financial practices have alarmed some investors and analysts.
Limited investment universe: By screening out certain companies or industries based on ESG criteria, investors might reduce the pool of potential investments. This limitation can lead to a less diversified portfolio and potentially higher concentration risks.
Higher fees: ESG funds and products can sometimes come with higher management fees compared to traditional investment products, as they require additional research and analysis to assess companies' ESG performance.
Morningstar Research: Sustainable Investing
Corporate Finance Institute: ESG Ratings
The World Economic Forum
Barnes & Thornburg