ESG INVESTING AND ANALYSIS

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What Is ESG Investing?

ESG stands for Environmental, Social, and Governance. Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities. ESG metrics are not commonly part of mandatory financial reporting, though companies are increasingly making disclosures in their annual report or in a standalone sustainability report. Numerous institutions, such as the Sustainable Accounting Standards Board (SASB), the Global Reporting Initiative (GRI) and CDP are working to form standards and define materiality to facilitate incorporation of these factors into the investment process.

CFA Institute Guide to ESG Investing for Investment Professionals

 

Environmental, Social, and Governance Issues in Investing

This guide to ESG investing takes fiduciary duty, externalities, disclosure, and other important ESG issues into account.

 

ESG Issues

 

There is no one exhaustive list of ESG issues. ESG issues are often interlinked, and it can be challenging to classify an ESG issue as only an environmental, social, or governance issue, as the table below shows.

These ESG issues can often be measured (e.g., what is the employee turnover for a company?), but it can be difficult to assign them a monetary value (e.g., what is the cost of employee turnover for a company?).

 

Examples of ESG Issues

 
Environmental IssuesSocial IssuesGovernance Issues 
Climate change and carbon emissionsCustomer satisfactionBoard composition 
Air and water pollutionData protection and privacyAudit committee structure 
BiodiversityGender and diversityBribery and corruption 
DeforestationEmployee engagementExecutive compensation 
Energy efficiencyCommunity relationsLobbying 
Waste managementHuman rightsPolitical contributions 
Water scarcityLabor standardsWhistleblower schemes 

ESG vs. SRI

 
ESG investing grew out of investment philosophies such as Socially Responsible Investing (SRI), but there are key differences. Earlier models typically use value judgements and negative screening to decide which companies to invest in. ESG investing and analysis, on the other hand, looks at finding value in companies—not simply at supporting a set of values.
 

Why Is CFA Institute Focused on ESG?

 
CFA Institute consistently monitors key debates and evolving issues in the investment industry. ESG investing and analysis has become of increasing interest to investment professionals globally as governments, asset owners, and high-net worth investors consider the impact of ESG factors on their investments and local markets. We believe more thorough consideration of ESG factors by financial professionals can improve the fundamental analysis they undertake and ultimately the investment choices they make. CFA Institute is specifically focused on the quality and comparability of the ESG information provided by corporate issuers and how to integrate various ESG factors into the investment selection process.
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