ESG criteria: definition and challenges to overcome

Responsible investment has become a major preoccupation for many investors concerned about the social and environmental impact of their investments. ESG (Environmental, Social and Governance) criteria have become a key element in the evaluation of companies and investments. The good news is that ESG-compliant investments often perform as well as, or even better than, conventional investments, contributing to their success. Interested in a career in sustainable investment? Find out more about our Master of Science Finance and gain access to positions of responsibility to innovate in the financial industry.

Deeptech : definition and origin

ESG criteria refer to the key areas of environmental, social and governance concern that are used to assess a company's sustainable performance. Green finance" environmental criteria refer to a company's impact on the environment, such as waste management, greenhouse gas emissions and use of natural resources. Social criteria assess a company's social practices, such as employee relations, human rights and community involvement. Governance criteria examine the company's governance structure, financial transparency, business ethics and management diversity.

ESG criteria are playing an increasingly important role in investment decisions, as they enable investors to measure and assess a company's overall impact on society and the environment. Investors recognize that companies that integrate good ESG practices are often better positioned to face future challenges and generate long-term sustainable returns. ESG criteria are used by investors to make informed decisions and align their portfolios with their values.

ESG criteria can be classified into different categories to facilitate the evaluation of a company's performance in each of these areas.

Criteria 1: Environment (E)

• Climate change and greenhouse gas emissions
• Water and energy management
• Waste management and recycling
• Biodiversity conservation

Criteria 2: Social (S)

• Occupational health and safety
• Employee relations and working conditions
• Diversity and inclusion
• Community involvement and social responsibility

Criteria 3: Governance (G)

• Corporate governance structure
• Independence of the Board of Directors
• Financial transparency and risk management
• Business ethics and anti-corruption

What role do ESG criteria play in sustainable finance ?

ESG criteria enable investors to choose investments that match their specific sustainability values and objectives. Investors can give priority to companies that adhere to strict ethical standards, have environmentally-friendly practices, contribute to social well-being and implement sound governance. This approach enables investors to channel their capital towards companies that are actively working to solve global challenges such as climate change, social inequality and corruption.

ESG criteria have proven their ability to generate long-term value for investors. Companies that integrate sustainable and responsible practices tend to be better positioned to deal with emerging risks, such as stricter environmental regulations or changing consumer expectations. They are also more likely to identify new business opportunities in an economy in transition towards sustainability.

By integrating ESG criteria, investors can also exert their influence to encourage companies to adopt better environmental and social practices, increase their transparency and improve their governance. This approach encourages companies to take ESG concerns into account and improve their overall sustainability performance.

The role of ESG criteria in obtaining the SRI label

ESG criteria are integrated into the management of SRI (Socially Responsible Investment) funds to assess the environmental and social impact of the companies in which they invest. Fund managers use these criteria to assess companies' sustainability performance and to select investments aligned with specific values. The integration of ESG criteria helps to reduce exposure to risks associated with unsustainable practices, and to identify investment opportunities that generate a positive impact on society and the environment.

The SRI label imposes specific ESG criteria on investment funds. These requirements vary from labelling body to labelling body, but generally include criteria for selecting and excluding companies on the basis of their ESG performance. Funds must demonstrate that they integrate ESG criteria into their investment process, and that they adhere to strict ethical standards. They must also provide transparency on their ESG management and reporting practices.

ESG criteria play an essential role in assessing the positive impact of SRI funds. They reinforce the credibility of SRI funds and encourage a better allocation of resources towards sustainable investments. Fund managers must demonstrate how their investments contribute to sustainability objectives, such as reducing carbon emissions, promoting human rights, improving corporate governance, or developing innovative solutions to social and environmental challenges. ESG criteria are used to assess the extent to which funds generate a positive impact in line with sustainability objectives.

The challenges of applying ESG criteria within a company

Issue 1: Risk management

The application of ESG criteria enables companies to identify and manage the risks associated with their activities. Environmental risks such as climate change, resource scarcity or natural disasters can have a significant impact on a company's operations and reputation. Similarly, social risks such as human rights issues, labor problems or social conflicts can affect financial performance and stakeholder confidence. The application of ESG criteria helps companies to identify, assess and mitigate these risks to ensure their long-term sustainability.

Issue 2: Creating long-term value

Investors and consumers are increasingly attracted to companies that integrate sustainable and responsible practices into their business model. By meeting rising sustainability expectations, a company can enhance its reputation, strengthen its relationship with customers, attract investment and stimulate innovation. The application of ESG criteria enables companies to seize emerging economic opportunities in the fields of the green economy, social innovation and corporate governance.

Issue 3: Stakeholder engagement

Stakeholders (employees, customers, investors, local communities, etc.) are increasingly aware of the importance of sustainability, and expect companies to act responsibly. By applying ESG criteria, companies can strengthen trust and collaboration by promoting transparency, communication and participation. This can lead to better mutual understanding, more informed decision-making and better management of the expectations and demands of company-related individuals and organizations.

Issue 4: Integration into corporate strategy

The application of ESG criteria requires effective integration into corporate strategy. This implies clear governance, management accountability and adequate resource allocation. Companies need to define specific ESG objectives, set up measurement and monitoring systems, and integrate ESG criteria into decision-making processes.

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