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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.

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CFA Institute's Guide to ESG Investing for Investment Professionals

This guide takes fiduciary duty, externalities, disclosures, and other important issues into account.

ESG Factors

There is no one exhaustive list of ESG examples. ESG examples 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 examples can often be measured (e.g., what the employee turnover for a company is), but it can be difficult to assign them a monetary value (e.g., what the cost of employee turnover for a company is).

  • Environmental

    Conservation of the natural world

    - Climate change and carbon emissions
    - Air and water pollution
    - Biodiversity
    - Deforestation
    - Energy efficiency
    - Waste management
    - Water scarcity

  • Social

    Consideration of people & relationships

    - Customer satisfaction
    - Data protection and privacy
    - Gender and diversity
    - Employee engagement
    - Community relations
    - Human rights
    - Labor standards
  • Governance

    Standards for running a company

    - Board composition
    - Audit committee structure
    - Bribery and corruption
    - Executive compensation
    - Lobbying
    - Political contributions
    - Whistleblower schemes

ESG versus 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 simply at supporting a set of values.

SRI uses exclusionary filters to keep companies out of portfolios that don't meet certain criteria, while ESG opts-in to companies that are making positive impacts in the three factor areas.

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.

CFA Institute to Develop ESG Disclosure Standards for Investment Products

CFA Institute is developing ESG Disclosure Standards for Investment Products that aim to build a framework for investment managers to better communicate, and their clients to better understand, the nature and characteristics of ESG-centric funds and investment strategies.

More from CFA Institute on ESG Investing