As the name suggests, ESG covers three broad categories:
Environmental – risks and opportunities around greenhouse gas emissions, water usage, and waste and pollution. This category focuses on both the outputs (what and how much the organization produces) as well as the inputs (the sustainability of the resources the organization needs to feed its processes). For example, a beverage producer may be concerned with sufficient, long-term availability of fresh water while also being aware of any environmentally undesirable byproducts of its production processes.
Social – risks and opportunities around employee relations, diversity, health and safety, and community support. Are employees, including those working for third parties, treated fairly? Are they paid fair wages? Are work conditions safe and free of unnecessary hazards? How does the organization impact and/or support the local community?
Governance — risks and opportunities around shareholder rights, board diversity, ethical decision-making, and deterring corruption and bribery. More and more, activist investors are looking for organizations that make money while maintaining transparency and high ethical standards. Global organizations such as the United Nations (UN) and the Organisation for Economic Cooperation and Development are particularly focused on mitigating corruption and bribery around the world.
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