ESG: The Three Pillars

• Environmental – This has to do with an organization's impact on the planet.
• Social – This has to do with the impact an organization has on people, including staff and customers and the community.
• Governance – This has to do with how an organization is governed. Is it governed transparently?

Environmental, social, and governance (ESG) is shorthand for an investing principle that prioritizes environmental issues, social issues, and corporate governance. Investing with ESG considerations is sometimes referred to as responsible investing or, in more proactive cases, impact investing.

Investing and ESG Funds

ESG really went mainstream when the framework became an integral part of many institutional investors’?playbooks. There are a growing number of ESG rating agencies that assign ESG scores, as well as new and evolving reporting frameworks, all of which are improving the transparency and consistency of the ESG information that firms are reporting publicly (often called ESG disclosure).

The capital markets can be a powerful tool to create change. By restricting access to capital (or making the terms under which it’s available less favorable), bad actors may be incentivized to improve performance across E, S, or G measures. Conversely, rewarding companies and their management teams that are performing well against ESG factors encourages continued progress and improvements.

Many ESG investment vehicles have emerged, including green bonds, mutual funds, ETFs, and index funds (among others). These publicly traded instruments make it easier for investors to align their investment decisions more closely with their own beliefs and values around E, S, or G factors.