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How does Impact relate to ESG?


Understanding Environment, Social and Governance (ESG)

ESG stands for Environmental, Social and Governance and is an integrated investment that considers environmental, social and governance impacts as secondary considerations but still makes a point to gain investment returns.

ESG’s three central factors are:

  • Environmental criteria examine how a business performs as a steward of our natural environment.
  • Social criteria, which looks at how the company treats people.
  • Governance criteria examine how a corporation policies itself – how the company is governed.

This broad spectrum considers all the impact types that drive and inhibit performance, although its main prospect is financial performance. In 2020, ESG investment popularity took off. This happens due to the growing number of investors seeking options to grow not only for their financial investments or assets but also to benefit society. A spectrum of socially dimensioned investments called “The Sustainability Smile” by Patrick Drum (Figure below), who has led Saturna Capital’s efforts (a firm) to help financial advisors connect with clients on sustainability-related issues which describe various social dimensions.

● Traditional finance: strictly on positive financial investment returns

● Philanthropic: no goal of financial investment returns.

● Integrated investing: where the investments do not neglect positive financial returns but have an overlay on the impacts from ESG aspects.

● Ethical/advocacy: where it balances profits by “excluding sin stocks” or “return forgiveness”, for example, investment return from firearms, addictive substances (alcohol or tobacco), etc.

● Impact/thematic: investments unconditionally subordinate to the social aspect of the investment or, in other words, the social/thematic investment is the prime focus of investment rather than the financial returns.

The need to understand ESG in creating impactful research or programs is crucial in the aspect pertaining to encouraging companies to act responsibly by avoiding risky behaviour or unethical practices. The ESG criteria particularly for social aspects focus mainly on company relationships with stakeholders, for example by committing profits to the community in solving social issues or economic problems and even on performing volunteerism of their workers to the community.

© Universiti Malaya
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