ESG refers to a set of factors related to environmental, social and governance issues. They may present both risks and opportunities for a particular investment, and can be used to define investment strategies, performance and risk metrics, and criteria for investment. Taking them into account in the investment process as well as in the ongoing operations, can help improve future financial performance.
Environmental criteria may include climate change and carbon emissions, air and water pollution, biodiversity, deforestation, energy efficiency, waste management and water scarcity.
Social criteria may include tenant satisfaction, gender and diversity, employee engagement, community relations, human rights and labour standards.
Governance criteria may include board composition, audit committee structure, bribery and corruption, executive compensation, lobbying, political contributions and whistleblower schemes.
The UN PRI defines ESG integration as “the explicit and systematic inclusion of ESG issues in investment analysis and investment decisions”. It is more than a decision about doing what is environmentally or socially responsible or morally right. Instead, it is about generation of long-term returns which is dependent on stable, well-functioning and well-governed social, environmental and economic systems. (Reference: https://www.unpri.org/fixed-income/what-is-esg-integration/3052.article)
Ultimately, Integrating ESG into investment decision making contributes to better long term decisions for stakeholders through visibility of risk and structured management of material risks.