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 Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the Task Force on Climate-related Financial Disclosures (TCFD) are working to form standards and define materiality to facilitate incorporation of these factors into the investment process.
Although sustainability reporting standards are in a nascent stage, CFA Institute brings a rich history of investor-focused advocacy for high-quality financial reports and independent audits – learn more about our sustainability reporting.
What are the key ESG factors?
The three main components of ESG factors are:
Environmental – conservation of the natural world.
Social – consideration of people and relationships.
Governance – standards for running a company.
Each component has a number of individual factors, which we have listed below. It’s important to note that there is no definitive taxonomy of individual ESG factors. They are often interlinked, and it can be challenging to classify an ESG issue as only an environmental, social, or governance issue.
Environmental factors
- Climate change and carbon emissions
- Air and water pollution
- Biodiversity
- Deforestation
- Energy efficiency
- Waste management
- Water scarcity
Social factors
- Customer satisfaction
- Data protection and privacy
- Gender and diversity
- Employee engagement
- Community relations
- Human rights
- Labor standards
Governance factors
- Board composition
- Audit committee structure
- Bribery and corruption
- Executive compensation
- Lobbying
- Political contributions
- Whistleblower schemes
Another challenge with individual ESG factors is that although they can often be measured (e.g., what the employee turnover for a company is), it can be difficult to assign them a monetary value (e.g., what the cost of employee turnover for a company is).
What is the difference between ESG and SRI?
ESG investing grew out of investment philosophies such as Socially Responsible Investing (SRI), but there are key differences. Earlier models typically use value judgments 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 just at supporting a set of values.
Explore our resources about SRI to learn more about this investment philosophy.
SRI Investing and Islamic Finance: Similarities and Differences
This report identifies the ESG and ethical considerations at the core of both SRI investing and Islamic finance by tracing the origins, historical connections, and the main concepts in both approaches.
Handbook on Sustainable Investments
Stay informed about recent trends in ESG and sustainable investing with these practical examples for institutional asset owners.
How can investors add value though ESG?
Investors can employ a variety of analytical approaches to address ESG considerations. Understanding the relative merits and limitations of ESG information and approaches can help to form a more complete picture of ESG risks and opportunities.
We have compiled a series of reports and guides to help you understand how to identify and assess ESG information, and integrate the findings into your investment decision-making process.
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ESG Integration Case Studies and the ESG Integration Framework
Read case studies focusing on ESG integration in equities and fixed income, and more.
Research Report
The Operating Model to Enable Sustainable Investing
Learn about ESG data quality, understand the barriers to widespread sustainable investing, and discover how to improve frameworks and standards.
Research Report
Guidance for Integrating ESG Information into Equity Analysis and Research Reports
A concise guide on how to identify ESG information, assess materiality, integrate ESG information into equity analysis, and present ESG information in research reports.
Why CFA Institute is 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.
Sustainable Investing in our Research and Policy Center
Read our latest research, download reports, listen to podcasts, and stay up-to-date with current sustainability trends.
Global ESG Disclosure Standards
CFA Institute has developed the Global ESG Disclosure Standards for Investment Products, which aims to build a framework for investment managers to better communicate to their clients the nature and characteristics of ESG-centric funds and investment strategies.
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Want to learn more about ESG Investing?
Choose your own learning path through our sustainability certificates: the foundational Certificate in ESG Investing and the advanced Climate Risk, Valuation, and Investing Certificate.
