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ESG Investing and Analysis

What Is ESG Investing?

ESG stands for Environmental, Social, and Governance. Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities. ESG metrics are not commonly part of mandatory financial reporting, though companies are increasingly making disclosures in their annual report or in a standalone sustainability report. Numerous institutions, such as the Sustainable Accounting Standards Board (SASB), the Global Reporting Initiative (GRI) and CDP are working to form standards and define materiality to facilitate incorporation of these factors into the investment process.

CFA Institute Guide to ESG Investing for Investment Professionals

ESG Issues

There is no one exhaustive list of ESG issues. ESG issues are often interlinked, and it can be challenging to classify an ESG issue as only an environmental, social, or governance issue, as the table below shows.

These ESG issues can often be measured (e.g., what is the employee turnover for a company?), but it can be difficult to assign them a monetary value (e.g., what is the cost of employee turnover for a company?).

Examples of ESG Issues

Environmental Issues Social Issues Governance Issues
Climate change and carbon emissions Customer satisfaction Board composition
Air and water pollution Data protection and privacy Audit committee structure
Biodiversity Gender and diversity Bribery and corruption
Deforestation Employee engagement Executive compensation
Energy efficiency Community relations Lobbying
Waste management Human rights Political contributions
Water scarcity Labor standards Whistleblower schemes

ESG vs. SRI

ESG investing grew out of investment philosophies such as Socially Responsible Investing (SRI), but there are key differences. Earlier models typically use value judgements and negative screening to decide which companies to invest in. ESG investing and analysis, on the other hand, looks at finding value in companies—not simply at supporting a set of values.

Why Is CFA Institute Focused on ESG?

CFA Institute consistently monitors key debates and evolving issues in the investment industry. ESG investing and analysis has become of increasing interest to investment professionals globally as governments, asset owners, and high-net worth investors consider the impact of ESG factors on their investments and local markets. We believe more thorough consideration of ESG factors by financial professionals can improve the fundamental analysis they undertake and ultimately the investment choices they make. CFA Institute is specifically focused on the quality and comparability of the ESG information provided by corporate issuers and how to integrate various ESG factors into the investment selection process.

More from CFA Institute on ESG Investing

Discover all ESG resources

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