What does environmental, social, and governance (ESG) criteria refer to?

Environmental, social, and governance (ESG) criteria refer to standards that investors apply to evaluate a company's operations as part of their investment screening process. These criteria help assess the sustainability and ethical impact of an investment in a company.

The "environmental" aspect looks at a company's impact on the natural environment, including factors like carbon emissions, waste management, and resource consumption. The "social" component examines the company’s relationships with stakeholders such as employees, suppliers, customers, and the communities where it operates, considering aspects like labor practices and community engagement. The "governance" part focuses on the internal practices and policies that govern a company, such as board structure, shareholder rights, and compliance with laws.

Investors increasingly leverage ESG criteria to identify risks and opportunities that traditional financial analysis may overlook, reflecting growing awareness of the impact of ethical practices on long-term viability and profitability of companies. This approach is integral for those aiming to align their investment strategies with personal or institutional values centered on sustainability and social responsibility.

In comparison, other options like guidelines for political campaigning, regulations on corporate taxation, and policies for employee behavior do not encompass the broad and impactful framework that ESG criteria represent in investment evaluations.