What is ESG, and Why is it So Popular, Rise of ESG criteria

Companies are increasingly applying ESG criteria in their strategies, but what is ESG? At present, companies must meet specific sustainable parameters when investing. And that is where the environmental factor (Environmental), the social aspect (Social) and the government factor (Governance) come into play. But why are these factors so important? And, why precisely now, after the pandemic, have they become more critical than ever?

What are ESG Criteria?

For investments to be considered responsible, they must meet specific environmental, social and governance criteria. That companies follow these criteria and act according to them will be significant because they can achieve greater profitability and a more explicit commitment to society.

ESG Factors Can be Classified into Three Large Groups:

The environmental factor: the ecological criteria are related to the care and conservation of the natural environment and the environment. Companies undertake, in this case, to make decisions based on how their activity may affect the environment. Either directly or indirectly.

The social factor: these criteria are related to the company’s management towards the people who may be affected by its activity. These are factors that affect employees, suppliers or communities that link with the company. Values ​​such as diversity, human rights, health care, or equality are concepts that increasingly impact company activities. Especially now, after the pandemic, social criteria have become very important.

The governance factor: related to the company’s management and leadership, internal policies, executive compensation, the structure of the board of directors or internal controls, among others. These factors are mainly based on transparency. And they serve, among other things, to study the impact that the shareholders themselves and the administration have on the company.

ISR and ESG: Two Related Concepts

Sustainable and Responsible Investing (SRI) is often confused with ESG criteria. And although they are concepts that are related, they are not the same. 

Companies have incorporated ESG criteria into their strategies because investors are also more critical of this type of criteria when choosing one investment.

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Thus, Socially Responsible Investment is an investment philosophy that integrates environmental, social and good governance criteria in studying, analyzing and selecting an investment. 

While the usual investment criteria had always been liquidity, profitability or risk, SRI incorporates additional ethical standards to the more traditional ones, those of ESG.

These ESG criteria have today become a differentiating factor when making investment decisions. The variables it contemplates do not enter into the analysis and financial performance. Still, they can be decisive in evaluating an investment in the present and, especially, in the future. 

And it is that, without a doubt, sustainability is profitable, and that is why ESG investments are one of the best investments in the new normal.

The Rise of ESG Criteria in the Post-Pandemic Society

The crisis unleashed by the coronavirus has marked a turning point in the rise of ESG criteria, and more and more investments are prioritizing this type of criteria. During the pandemic, social standards have become highly relevant due to the pandemic. That is why most companies spent much more time during the health crisis on social issues than on issues related to benefits.

But in addition to the social, in 2020, especially 2021, there has been an increase in concern about environmental issues. That is why ecological criteria have also gained much prominence in recent years. And it is expected that when normality returns, this factor will play an even more critical role in the positioning of companies. 

Today, investors have considerably increased their interest in how companies apply sustainability policies or the policies for the transition to a low-carbon economy.

Thus, companies should no longer see ESG criteria as an option or something distant that does not affect them; instead, they should consider more and more firmly that not incorporating them into their corporate strategy could ultimately lead to financial risk or a decline. 

In its positioning. It is already clear to many experts that companies that better deal with environmental, social and governance factors can reduce risks and considerably improve their competitiveness in the market.

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