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The ABCs of ESG: Evaluating the Social Practices of a Company

The ABCs of ESG: Evaluating the Social Practices of a Company

Matthew Griffith, CFA, Senior Research Analyst & Brent Williams, CFA, Senior Research Analyst

You may have heard of ESG investing, but what is it really? ESG investing focuses on identifying companies that have strong Environmental, Social, and Governance ratings. While the Environmental component of ESG is often clear and easy to understand for individual investors (think greenhouse gas emissions, pollution, and usage of recyclables and renewable energy), the factors considered for a Social rating can be less obvious. This part of our Perspectives series on ESG investing focuses on the “S.”

Social factors encompass a wide range of topics related to how a company impacts all of its “stakeholders,” including employees, customers, and the communities in which it operates. For example, companies that treat employees as partners would typically receive higher ESG scores. Labor relations, workplace safety, training and development of employees, and labor standards of both the company and those of its suppliers factor into the human capital component of the Social rating.

A company’s products and services also have an impact on stakeholders. Risks vary across different industries, and can include the quality of a physical product, the safety record for a product, or whether a product poses a health risk. For example, a tobacco company would score low on measures of product health risk. Financial services companies are exposed to different product risks, such as whether product fees are appropriate or if the service meets a legitimate financial need. Both financial services and technology companies are also evaluated based on how they mitigate risks related to data privacy and security.

Finally, Social ratings consider how a company positively impacts the broader community. Health care companies are rated favorably if they have programs in place to ensure access to medicine for patients around the world who cannot afford to pay. Providing communities in need access to low-cost communication and financial services can also differentiate a company relative to its peers.

An increased focus on ESG investing is pushing companies to be more attentive to how they impact the world around them. By factoring ESG into portfolio construction, an individual investor has the ability to direct his or her investments towards companies that strive for excellence and push their industry peers to improve as well.

Additional Perspectives pieces on ESG can be found here. For more information, contact a D.A. Davidson financial advisor.

Source: MSCI

Information contained herein has been obtained by sources we consider reliable, but is not guaranteed and we are not soliciting any action based upon it. Any opinions expressed are based on our interpretation of the data available to us at the time of the original publication of the report. These opinions are subject to change at any time without notice. Investors must bear in mind that inherent in investments are the risks of fluctuating prices and the uncertainties of dividends, rates of return, and yield. Investors should also remember that past performance is not necessarily an indicator of future performance and D.A. Davidson & Co. makes no guarantee, expressed or implied to future performance. D.A. Davidson & Co. is a registered broker-dealer and registered investment adviser that does not provide tax or legal advice. Investors should consult their financial and/or tax advisor before implementing any investment plan. Copyright D.A. Davidson & Co., 2018. All rights reserved. Member SIPC.


Research, ESG