ESG (Environmental, Social, and Governance)
Investment criteria that evaluate companies based on environmental impact, social responsibility, and ethical governance practices.
What You Need to Know
ESG investing goes beyond profits to consider how companies impact the world. It's the framework for "sustainable" or "socially responsible" investing.
The Three Pillars:
Environmental (E):
- Carbon emissions and climate change
- Renewable energy usage
- Waste management and pollution
- Water conservation
Social (S):
- Employee treatment and diversity
- Customer satisfaction
- Community impact
- Human rights in supply chains
Governance (G):
- Board diversity and independence
- Executive compensation
- Anti-corruption policies
- Shareholder rights
ESG in Practice:
- High ESG Score: Microsoft (renewable energy, board diversity)
- Low ESG Score: Traditional oil companies (emissions, environmental damage)
Performance Debate:
- Some studies show ESG funds match or beat traditional funds
- Others show slight underperformance due to limited investment universe
- Higher expense ratios (0.2-0.5% more) can eat into returns
The Bottom Line: ESG lets you align investments with values. You're not just asking "will this make money?" but "does this company match my ethics?" Trade-off: potentially lower returns and higher fees, but growing evidence suggests competitive performance.
Sources & References
This information is sourced from authoritative government and academic institutions:
- sec.gov
https://www.sec.gov/files/esg-disclosure-keeping-pace-with-developments-affecting-investors.pdf
Related Calculators & Tools
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Related Terms in Investment Analysis
Appreciation
The increase in an asset's value over time, whether it's real estate, stocks, or other investments.
Asset Class
A group of investments with similar behavior, risk, and regulatory profiles (e.g., stocks, bonds, cash).
Bond
A fixed-income investment where you loan money to a government or corporation in exchange for regular interest payments.
Bond Yield
The return an investor earns on a bond, expressed as a percentage, which can be calculated as current yield (annual interest ÷ current price) or yield to maturity (total return if held until maturity).
Capital Gains Tax
Tax on profits from selling investments like stocks, bonds, or real estate.
Capital Loss
A loss realized when you sell an investment for less than you paid for it, which can offset capital gains for tax purposes.