Sustainable Investing - ESG definition | Robeco USA (2024)

Sustainable Investing

What is the definition of ESG? ESG means using Environmental, Social and Governance factors to assess the sustainability of companies and countries. These three factors are seen as best embodying the three major challenges facing corporations and wider society, now encompassing climate change, human rights and adherence to laws. It now forms the bedrock of sustainable investing, since ESG factors are fairly objective and easy to apply to analysis of a company’s products, services and behavior.

Sustainable Investing - ESG definition | Robeco USA (1)

The three ESG factors:

Environmental

Environmental factors cover pollution, greenhouse gas emissions, waste generation, energy efficiency and the impact on biodiversity. The need to tackle climate change led by lowering emissions to achieve net zero by 2050 has made this factor much more important than simply looking at primarily localized issues such as pollution of waste disposal.

Social

Social factors include attitudes to diversity and labor standards at a company’s main operating centers and in its supply chains, along with more routine issues such as workplace health and safety. In extreme cases it can relate to the use (wittingly or otherwise) of child or forced labor, and wider human rights issues such as sourcing from conflict areas.

Governance

Governance factors cover how well a company is managed, from boardroom diversity and gender equality, to being free from corrupt practices. Good governance also includes how well capital is distributed, how external or minority shareholders are treated, and whether the firm adheres to recognized standards regarding accounting and risk.

How do companies and countries score on sustainability?

Explore the contributions companies make to the Sustainable Development Goals and how countries rank on ESG criteria.

Find out more

3 pillars of ESG

Sustainable Investing - ESG definition | Robeco USA (2)

Differing exposures

Companies will have differing exposures to ESG factors depending on what they do. A miner, for example, will be heavily judged on its environmental records, including any pollution caused by extraction and the remediation of mined areas. The E is also a huge issue for high carbon emitters led by energy companies who are at the forefront of net-zero decarbonization efforts.

Social issues will be bigger for companies in the hospitality and retail sectors which typically have larger but lower-paid workforces with less secure employment conditions or pension eligibility. The Covid pandemic laid bare just how vulnerable many people were at work. Gender pay gaps remain a problem for most companies, while racial or other forms of discrimination can surface at some.

Governance is a bigger problem for companies such as banks which have faced huge issues with risk management – leading to many financial crises over the years – particularly where incentive schemes prioritized short-term profits over long-term stability. The financial industry is less affected by environmental or social issues as they tend to be low emitters with more highly paid staff.

A brief history of ESG

The basis of ESG comes from the United Nations World Commission on Environment and Development – known as the Brundtland Commission – which is most notable for coining the term ‘sustainable development’. This was defined as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

Tying this into corporate activities later led to a concept of the ‘three Ps’ – People, Planet, Profit – gaining traction in the 1990s. This argued that a focus on each of these three words (and not just profit) was equally important for any commercial enterprise to be sustainable. This morphed into a more specific focus on environmental (planet), social (people) and governance (profit) factors.

Robeco has routinely integrated ESG since 2010, and now uses it across the entire range of fundamental equities, fixed income, quantitative and bespoke sustainability strategies – one of the few asset managers in the world to use such an all-encompassing approach. Some 96% of investment products are classified as Article 8 (using ESG factors) or Article 9 (pursuing a specific sustainability objective) under the EU’s Sustainable Finance Disclosure Regulation (SFDR).

Assessing countries

ESG factors are also used to assess the sustainability of countries. The Robeco Country Sustainability Ranking particularly looks for energy use (E), human rights (S) and political unrest (G) when assessing domestic risks. This information is then used as part of the decision-making process for buying government bonds.

Since the political and economic stability of any country is set by the government and the system it uses – particularly regarding whether it is a democracy, autocracy, or embroiled in civil unrest – the G factor has the highest weighting of 40%. Social factors which are largely a result of the political system used are given a weighting of 30%, with the remaining 30% for environmental factors. Amid the weightings, 7.5% of the scores are now attributed to biodiversity (E), human ageing (S) and corruption (G).

ESG investing

We integrate environmental, social and governance criteria into the majority of our investment processes.

Read more

More glossary terms

Sustainable Investing Quantitative Investing Fixed income

Sustainable Investing - ESG definition | Robeco USA (2024)

FAQs

What is ESG sustainable investing? ›

This type of ethical investing strategy helps people align investment choices with personal values. ESG stands for environment, social and governance. ESG investors aim to buy the shares of companies that have demonstrated a willingness to improve their performance in these three areas.

What is the ESG policy in the US? ›

1.2 What are the main ESG disclosure regulations? In the United States, the SEC requires all public companies to disclose information that may be material to investors, including information on ESG-related risks, and has issued guidance and rules setting forth its disclosure expectations.

What is USA ESG? ›

The MSCI USA ESG Select Index is designed to target companies with positive environmental, social and governance (ESG) factors while exhibiting risk and return characteristics similar to those of the MSCI USA Index.

How is ESG Investing different from sustainable investing? ›

ESG, therefore, looks at how a company's management and stakeholders make decisions; sustainability considers the impact of those decisions on the world.

What is the difference between sustainable investing ESG and SDG? ›

The SDGs are a set of 17 goals adopted by the United Nations in 2015 to end poverty, protect the planet, and ensure prosperity for all. ESG factors are a set of criteria used to measure the sustainability and responsible business practices of companies. The SDGs and ESG factors are closely related.

Is ESG reporting mandatory in the USA? ›

Is ESG reporting mandatory in the United States? There is currently no federal mandate for ESG (Environmental, Social, and Governance) reporting in the United States. However, there are various initiatives and regulations that require companies to disclose certain ESG information.

What is Biden ESG rules? ›

Congress in March passed a Republican-backed resolution to repeal the rule but Biden, a Democrat, vetoed it. ESG involves factors that investors may take into account such as a company's climate- and environment-related policies, diversity practices and corporate governance issues such as executive compensation.

Who regulates ESG in the US? ›

In the United States, ESG-related regulatory risk primarily originates from three key sources: the US Securities and Exchange Commission (SEC), the US Department of Labor (DOL), and state legislatures and agencies.

What are the new ESG regulations? ›

On March 6, 2024, the SEC adopted new climate disclosure rules. These rules require companies to publish information that describes the climate-related risks that are reasonably likely to have a material impact on a company's business or consolidated financial statements.

What is the largest ESG fund us? ›

As of July 2023, the leading Environmental, Social, and Corporate governance (ESG) related ETF by Assets Under Management (AUM) was the iShares MSCI USA SRI UCITS ETF.

Is Bank of America using ESG? ›

Our approach to environmental, social and governance (ESG) priorities is guided by our commitment to Responsible Growth and doing so in a sustainable manner, which helps us deliver for our clients and stakeholders and address societal issues.

What is an example of ESG investing? ›

Examples include Dow Jones Sustainability Index, Bloomberg ESG Data Services, Thomson Reuters ESG Research Data, and others. The ESG scores measure companies' efforts in reducing carbon footprints, greener technology usage, community development projects, tax abiding, and avoiding legal issues.

Why do people do ESG investing? ›

Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty.

What are the disadvantages of ESG investing? ›

However, there are also some cons to ESG investing. First, ESG funds may carry higher-than-average expense ratios. This is because ESG investing requires more research and due diligence, which can be costly. Second, ESG investing can be subjective.

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