ESG
Environmental, Social, and Governance — a framework for evaluating companies based on their environmental impact, social practices, and corporate governance alongside financial metrics.
Example
“The ESG fund avoided companies with poor environmental records and weak corporate governance.”
Memory Tip
ESG = Environmental, Social, Governance. The three lenses for ethical investing.
Why It Matters
ESG helps investors align their money with their values while potentially reducing risk. Companies with strong environmental and social practices often face fewer regulatory fines, lawsuits, and reputational damage, which can protect your investments over time.
Common Misconception
Many people think ESG investing means sacrificing returns for moral principles. In reality, studies show that companies with strong ESG practices often perform comparably to or better than their peers financially over the long term.
In Practice
An investor might choose to buy shares in a solar panel manufacturer with high ESG scores instead of a coal company, even if both are in the energy sector. The solar company may face lower future regulatory costs and has better long-term growth potential, while the coal company risks stranded assets and declining demand over the next decade.
Etymology
Acronym for Environmental, Social, and Governance. The three pillars of non-financial corporate evaluation.
Common Misspellings
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