The environmental pillar
The key question to ask here is how does a company’s behaviour affect or impact the environment?
Admittedly, this is a broad-based category. Climate change, pollution and waste are prominent considerations, however there are a few other issues that could be a risk to a company’s long-term financial health and survival.
- Its use of or dependence on fossil fuels
- Its use or management of water and other resources
- Pollution levels
- Climate change
- Hazardous materials and their disposal
- Carbon footprint and whether it uses renewable energy
Investors can also consider environmental opportunity such as:
- Switching to renewable sources of energy or fuel
- Utilising processes that conserve resources and minimise pollution
- Adopting a carbon neutral stance or reducing carbon footprint
- Planet restoration for example planting trees
- Adopting clean energy initiatives
Environmental considerations take on particular significance when looking at companies in the chemical, energy, and utility sectors.
The social pillar
In this pillar we consider the effect of a company’s behaviour regarding social issues.
These could include:
- Employment equality and gender diversity
- Product safety concerns and liability
- Employee health and safety
- Training and development
- Animal testing
- Stance on various physical and mental health-related issues, such as topics such as drug abuse, gambling and reproductive choice
- Supply chain transparency
- Human rights
- Privacy issues
The governance pillar refers to how a company operates internally, its corporate behaviour.
Other government issues that might be considered when evaluating a company include:
- Compensation of employees and board executives
- Board and company diversity
- Tax strategy and accounting standards
- Bribery and corruption
- Ethics and values
- Transparency and anti-corruption
- Shareholder rights
There are no official rules or clear guidelines about how an investment house should include ESG values in its investment selection criteria, indeed many continue to ignore ESG entirely. It’s up to the individual asset owners to choose which methodology best fits their values.
At Tern PLC we have integrated environmental, social and governance factors into our decision-making process when considering investments.