What are ESG Principles and Why Are They Important For Building A Sustainable Portfolio?

Now what are ESG principles? ESG stands for Environmental, Social, and Governance. By focusing on these three main factors, you can enhance your financial stability while being able to spread your positive contributions to the world.

 

Environmental Principles
These principles are based on a company's ecological footprint. While there are many parts to a company’s ecological footprint, the three most important ones are the company’s carbon emissions, resource management, and waste management. When evaluating a company there are many questions one should ask. For example: Are their current carbon emissions environmentally friendly? Are they using their resources most efficiently? Is the company transparent with its environmental effects? Are they disposing of recyclable materials and hazardous materials correctly and safely? Does the company work to limit their impact on the climate? Overall, these environmental principles can be summarized with one word: sustainability. The company must be able to sustain its resources, methods of energy usage, waste management, etc.

​

Social Principles

A company’s social factors encompass human rights and benefits for the community. A company's discriminatory practices, fair employment, worker safety, and worker well-being are all the main factors of this sector. For example, companies with a pattern and history of discriminatory practices, injury, and a poor workplace environment would not rank high on social principles. For a higher rating in this regard, a company must not only treat the current employees well but also offer opportunities to lower-ranked employees to grow their careers. Generally speaking, a company must promote a diverse workplace and enforce the secure handling of its data to have a higher rating on social principles. The final part of the social principles is the way the company handles its data. The company’s data should be private and susceptible to leaks.

​

Governance Principles
Social and governance principles are often mistaken for each other. However, unlike social principles, governance principles focus on the handling of a company’s partnerships and the way its board is set up. As with social principles, diversity is important for a company's governance principles, except with regard to the company’s board. The wages a company pays to its employees are another governance principle. The pay should align with the company’s financial success and goals for best performance. The company's ethics have an impact on governance principles, which cover stakeholder relations. A successful business with a positive impact has open, honest communication with both internal and external stakeholders. Another crucial factor is how businesses handle risks and rules. It's crucial to take into account a company's risk-mitigation strategies as well as its track record of adhering to the law.

​

Impacts On Your Portfolio Financially and Impact Investing 

Besides the virtuous reasons of implementing the use of ESG principles, they are also used for financial benefit. It has been observed and proven by research that companies with higher ESG scores tend to outperform companies with lower scores and yield higher returns. Some reasons for this are that a company that follows ESG principles is sustainable and has better communication with its customers which increases customer loyalty. Both of these factors are essential to a company’s long-term growth. You can find the ESG ranking of companies on the internet from many different resources, as well as on our company analyses.
The application of ESG principles falls under the category of "Impact Investing," which asks investors to think about the impact their investments have. Impact investing using the ESG principles is a terrific method to help the world around you and have a lower-risk portfolio. ESG principles can be used in conjunction with other investment methods, such as diversification, to create a solid, low-risk portfolio that can help you achieve financial success and make a beneficial contribution to society.

Improve our world, and worker well-being, and yield higher returns? How could anyone say no to that?