Environmental, Social and Governance Criteria

Environmental Social and Governance Criteria

Source: Adapted from World Economic Forum (2020) Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.

Environmental, social, and governance (ESG) criteria have been advocated by the World Economic Forum as a stakeholder capitalism approach trying to define corporate standards that can be used for investment purposes. Several terms have previously been used for such a purpose, including socially responsible investing and sustainable investing. ESG, as its name states, is oriented along three major criteria. The first, environmental, reports how a corporation has strategies for safeguarding the environment, such as reducing its carbon emissions and impacts on ecosystems. The second, social, is a proxy for corporate relations with a variety of stakeholders such as employees, suppliers, and customers, which is expanded to include communities in which it is located. The last, governance, covers issues such as compensation (leadership and workers), the composition of the workforce, and ethical behavior.

These criteria have been articulated around a series of indicators that can be used to assess to what extent a corporation meets stated ESG goals by a variety of rating agencies that have developed ESG indices, particularly those involved in market capitalization. The best known are Bloomberg, Standard and Poors, and Dow Jones. Still, the usage ESG is subject to controversy as it can derail investment and strategies toward actions that may not be in the best interest of the corporation.