The Elements of ESG

Discover how the elements of ESG can enhance the value of your investments, while contributing to a sustainable world.      

Chemistry, unlike other sciences, sprang originally from delusions and superstitions, and was at its commencement exactly on a par with magic and astrology.
Thomas Thomson, Scottish chemist, 1773-1852

Although it wasn’t until the 16th century that chemistry began to separate itself from its predecessor, alchemy, its origins date back to the beginning of humanity. Chemists began using the scientific method to conduct experiments and prove the validity of various theories. Today, this branch of science is firmly established alongside physics, biology and other “hard” sciences.

Like chemistry, environmental, social and governance (ESG) concerns have been part of our collective psyche for millennia. But while chemistry includes the study of the elements that make up matter, ESG studies material risks and opportunities that matter for potential investments. But how does one define ESG? And how does the identification of material ESG risks alongside other risks (such as financial risks) support the achievement of long-term investment objectives?

It’s time to put aside delusions and superstitions and instead focus on the very real ways ESG investing can help investors, asset managers and individual companies align their interests to create a better portfolio and, ultimately, a better world. As we become more familiar with the elements of ESG, we will learn what differentiates ESG from other types of stewardship, the trends driving the adoption of ESG principles in investment strategies and what investors should look for in an ESG-focused manager.

Let’s start with the basics: How does one define ESG investing?

ESG investing focuses on mitigating three types of material risks:

Environmental. Environmental factors relate to how a company views itself with regard to environmental conservation and sustainability. Types of environmental risks and opportunities include a company’s energy consumption, waste disposal, land development and carbon footprint, among others.

Social. Social factors deal with a company’s relationship with its employees and vendors. Risks and opportunities can include (but aren’t limited to) a company’s initiatives related to employee health and well-being, and how supplier relationships align with corporate values.

Governance. Corporate governance factors can include the corporate decision-making structure, independence of board members, treatment of minority shareholders, executive compensation and political contributions, among others.

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