ESG Explained

In Back to School Week, we're explaining some of the most common investment acronyms

Holly Black 27 August, 2021 | 8:39AM
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Holly Black: Welcome to the Morningstar Investment ABC. We are going to go through some of the most common acronyms in the investment world which sound really confusing and off-putting, but aren't as bad as you think, and the aim is to prove that investing is as easy as ABC. 

Jack Thompson: Hello. My name is John Thompson, and today's letters are ESG. E is for environment. S is for social. G is for governance. 

Black: Thanks Jack. So, yesterday's word is ESG; environmental, social, governance. Now, this is becoming increasingly common in investing as we become more sustainably-minded and start to think with our investments, not just about financial returns, but the impact we're having on the world. 

So, E is probably the best known, is environmental. So, when you're an investor, you might consider before choosing a stock, the level of carbon emissions or its use of plastic. You might rule out, for example, big oil companies because you're worried about the impact that they're having on the world. 

S is gaining a bit of traction now. It's social. So, this is to do with how a company treats its workforce, its employees, but also the community in which it operates. So, this might be things like modern slavery, which was a big issue last year and how companies treated their workforce through the COVID pandemic. That was a big social issue. 

G is governance. This is all to do with transparency. Is a company good at reporting? Is it at risk of bribery or corruption? These are factors to do with the corporate governance of a company and how its top level bosses are operating.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Holly Black  is Senior Editor, Morningstar.co.uk