Environmental, Social, and Governance (ESG) describes a framework applied to corporate entities. ESG metrics provide a view of business practices through certain non-financial performance indicators. The indicators can apply to publicly traded corporations, project companies, financial institutions, and private investees of any structure. This is a framework to assist stakeholders to understand how an entity manages risks in the three pillars and how it achieves milestone metrics in each. A regime of corporate reporting standards has developed to provide stakeholders a picture of how a company manages risks and captures rewards through ESG metrics.
In addition, ESG describes an investment approach. The term has become largely interchangeable with sustainable investing. Primarily used to describe publicly traded investments, ESG encompasses a range of thematic ESG investment strategies. ESG ratings providers offer investors a route to evaluate ESG investment funds and vehicles. Market regulators have been unveiling rules around (a) the labeling of ESG funds and (b) disclosure requirements for publicly traded firms.
A corporate entity demonstrating strength in the E pillar is:
- Taking action to combat climate change
- Mitigating climate risk in operations
- Protecting the environment
- sing natural resources wisely
- Seeking energy efficiency in operations
A corporate entity demonstrating strength in the S pillar is:
- Demonstrating diversity and equality in all levels of workplace
- Providing workplace that values diversity and inclusion
- Attending to supplier diversity and equality
- Incorporating equality in products and services
- Employing inclusive language in communications with community
A corporate entity demonstrating strength in the G pillar is:
- Demonstrating board diversity
- Practicing financial transparency
- Upholding integrity in accounting, executive compensation, and other practices
- Ensuring that shareholder rights are in place.
- Refraining from fraud and illegal conduct.
ESG equity and fixed income investment funds and portfolios focus on companies exhibiting broad-based ESG strength or companies that are leaders within an ESG thematic investment strategy. In the public investing sphere, there has been tension between whether corporations should provide benefits to all stakeholders versus maximizing profits for shareholders. Stakeholders include all who are impacted by environmental and climate considerations, including mismanagement, as well as all who are impacted by inequality, including gender workforce, wage, wealth, and leadership gaps.
ESG equity investing has been dominated by E pillar focus areas. More recently, investor surveys have indicated a shift toward incorporating S pillar considerations. For investors, corporate G indicators have improved over the past several decades due to legislation and regulation in a range of markets, and due to the rise of shareholder activism. Some G indicators, such as board and workforce equality, overlap with S indicators, which tend to include both internal and external stakeholders.
We advocate for all ESG funds and portfolios to include investment criteria around gender equality.
For more insights on combining the gender lens in ESG investing, see Gender Lens + ESG Investment Criteria.
How can ESG investments incorporate a gender lens? See our proposal for incorporating a gender lens into each pillar of traditional ESG investment definitions and criteria.
To explore the inclusion of ESG factors in gender lens equity funds, see Environmental, Social and Governance (ESG) Pillars in Gender Lens Investing (GLI).