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What is ESG?

2 min read
Published on July 18, 2022
By Fennel Staff

How a company acts affects more than just its product or its bottom line, it affects the world around it — for better or for worse. Conscious consumers are paying attention to these actions and using that information to decide whether they want to support those companies.

For example, if you hear that a restaurant underpays its workers, you might avoid eating there out of principle. If you find out a large paper manufacturer is dumping dangerous chemicals into a nearby river, you may buy your notebooks elsewhere. Or you might choose support companies that have pulled out of Russia after the country invaded Ukraine, and boycott the ones that haven’t.

Holding companies accountable can go beyond deciding whether or not to buy their products. It can also extend to deciding whether or not to invest in them. This is often referred to as impact investing, which Investopedia defines as “a general investment strategy that seeks to generate financial returns while also creating a positive social or environmental impact.”

Impact investing requires us to understand how a company impacts the world. But companies’ impacts aren’t easily defined. Corporations make countless decisions every day. Certain decisions are well publicized, while others fly under the radar. Some decisions are trivial, and others can affect entire communities.

This is why a growing number of investors have been turning to a framework called ESG to assess whether or not a company operates responsibly and ethically in relation to the environment, society, and its corporate governance. ESG stands for the following:

  • Environmental — Focuses on how a company treats the environment and preserves natural resources
  • Social — Examines how a company manages relationships with its employees, partners, and customers, as well as the communities it’s part of.
  • Governance — Deals with a company’s leadership, board of directors, executive pay, audits, internal controls, shareholder rights, and other topics related to how a company is run.

Each pillar incorporates a wide variety of information in order to evaluate a company’s impacts. Within the pillars, there are subcategories that focus on specific facets of how a company operates. For example:

  • “Renewable Energy Use” falls within the Environmental pillar.
  • “Child Labor Controversies” falls within the Social pillar.
  • “Board Gender Diversity” falls within the Governance pillar.

There are dozens of subcategories that make up each pillar of ESG. With all of these factors to account for, some ESG data providers use numerical scores to help people understand how companies stack up against one another.

For example, Fennel gets its ESG data from Refinitiv, which gives companies an ESG score out of 100 (you can check out this page for more information on Refinitiv’s scoring).

At Fennel, we take this information and make it accessible for investors — so you can see how companies affect the world. With this, you can decide how you want to affect the world through your investments.

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