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What are environmental, social and governance criteria?

Written by Eric Ebbert CFP®, MBA

On September 2, 2021

Picking your investments is a lot like picking which vegetables to have with your dinner. How is that, you ask? Well, you can pick vegetables based on your personal preferences, what is available, or if they are organically and ethically sourced. 

These basic criteria are similar to the ways many people make decisions about which companies to invest in. However, instead of the criteria your vegetables must meet to be considered organic, investors can use environmental, social and governance criteria for their investments. 

What are environmental, social and governance criteria?

In recent years, investors have begun to think hard about how the companies into which they invest operate on a day-to-day basis. To continue the vegetables analogy, is the company producing the vegetables peddling chemical-laden, frozen peas? Or do they provide organic, sustainably grown sugar snap peas? Environmental, social and governance (ESG) criteria are intended to help people make more ethical investing decisions. And this is a growing trend. A report by US SIF: The Forum for Sustainable and Responsible Investment reveals that investments that met ESG standards grew 38% between 2016 and 2020. 

Here is some information breaking down the three criteria: 

  1. Environmental — This category of criteria involves looking at how companies interact with the natural world. A commonly used criterion in this category is what type of energy a company is using to create its products or offer its services. Environmental criteria can also include factors like: 
  • How much waste and pollution a company creates. 
  • How they deal with their waste and pollution.
  • What steps they take or plan to take to reduce negative impacts on the environment. 
  1. Social — Societies are made up of many parts, and the social criterion for ESG investing is too. These criteria look at how the company interacts with the communities that surround it, whether physical or virtual. Social criteria can also include looking at the types of suppliers a company uses and how it interacts with its employees. 
  1. Governance — Every company has a specific governance structure, which is typically presided over by a chief executive officer (CEO). Governance criteria considers how a company’s governance structure functions. Are its accounting and other practices transparent to shareholders and potential investors? Investors may also be looking at how a company chooses its board members or executive officers. They could also be concerned with how a company interacts with political figures. 

It is rare for a given company to meet every one of the ESG criteria. As a result, investors typically must do plenty of research and choose the best fits for their values. It is during these two steps that you can benefit from working with a CERTIFIED FINANCIAL PLANNER™.

Talk to a ProVise CFP® professional about ethical investing

At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.

Are you ready to talk to a professional to ensure that your investments fit ESG criteria? Contact ProVise today to schedule a complimentary consultation.

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