What Is ESG Compliance & How Can Individual Investors Use It To Screen Investment Opportunities?

Picture of wind turbines — environmental sustainability is an important part of ESG compliance
Environmental sustainability is just one of several elements that make up ESG compliance

Socially responsible investing and impact investing are some of the most common sustainable investing strategies.

Conscious investing goes by many names, with environmental, social and governance (ESG) investing being the best-known term.

The driving factor behind ESG investing is ESG compliance, which dictates what investments can be considered conscious and sustainable.

In this blog, we will take a closer look at ESG compliance to define the elements that make up ESG compliant investment opportunities, explain how investors can find such opportunities and share how you, as an investor, can be ESG compliant.

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What Is ESG?

The Environmental Social Governance (ESG) framework evaluates the sustainability efforts and compliance of a specific company to determine how environmentally, socially and governmentally responsible that company is.

The concepts of socially responsible business operations and socially responsible investing have existed since the second half of the 20th century.

The term ESG, however, was first introduced to a wider audience by a 2004 United Nations Global Compact report that outlined general ESG implementation guidelines for companies, NGOs, consultants and other business entities.

Today, the ESG framework is mostly used by conscious investors to find investment opportunities that fit their sustainability requirements.

What Are The Sustainability Factors That ESG Evaluates?

While the ESG compliance criteria are not formally set in stone by any legislation, most specialists typically follow the guidelines outlined in the 2004 UN report.

As the report and the methodology name suggest, ESG compliance analysis evaluates the following sustainability factors.

#1: Environmental Compliance

Environmental compliance criteria evaluate a company’s impact on nature and the environment.

For an organization to be environmentally compliant within the ESG framework, it must aim to minimize and, ultimately, eliminate whatever negative environmental impact it may have.

The environmental compliance criteria include:

  • Adherence to environmental protection laws and regulations
  • Preparedness and response to climate change
  • Greenhouse gas emissions
  • Sustainable waste management
  • Sustainable water and energy supply

#2: Social Compliance

Social compliance criteria relate to a company’s commitment to social causes and the impact that the company’s operations have on society.

According to ESG, a socially compliant company should actively work towards resolving social issues both within its organization and in the society it’s part of.

The social compliance criteria include:

  • Gender equality
  • Racial and ethnic equality
  • Adherence to labor laws and regulations
  • Fair employment practices
  • Social activism
  • Stakeholder relations

#3: Governmental Compliance

Governmental compliance criteria revolve around a company’s internal executive practices.

The focus of governmental compliance evaluation in ESG is to determine whether the company’s management follows the principles of sustainable corporate governance.

The governmental compliance criteria include:

  • Transparent accounting practices
  • Shareholder relations
  • Tax code compliance
  • Executive diversity
Picture of a diverse corporate executive team which illustrates the governance sustainability compliance element of ESG compliance
Executive team diversity is among the requirements that a company needs to fulfil to be ESG compliant

Why Should Individual Investors Use ESG Standards To Screen Opportunities? 3 Valuable Benefits

The fact that sustainability is difficult to define in specific, measurable terms can make ESG investing intimidating for beginner investors, to the point where some of them can’t help but wonder:

Are my investments truly sustainable and socially responsible?

That’s precisely where the ESG framework and its evaluation criteria can help. Here’s how you, as an investor, can benefit from it.

#1: ESG Criteria Help Standardize The Evaluation Process

Evaluating a company’s sustainability track record is more complicated than it seems.

Different companies might use different terminology for their sustainability efforts, share it in different ways with their stakeholders — or not share it all. This can make the process of gathering and analyzing data unnecessarily complicated.

For example, Company A might use a completely different set of sustainability metrics than Company B, and Company C might use the same terms as the other two but with different definitions and scales.

Applying the ESG criteria can help you evaluate a company’s sustainability efforts in a more standardized, efficient manner.

A standardized ESG compliance analysis can help you ensure that you’re comparing apples to apples and, ultimately, help you make the right investment decision.

#2: ESG Standards Help Your Investments Adjust To Market Changes

The market is never static — anything can happen.

A company could change its policies, the market trends could shift, or negative information could become known. Maintaining a portfolio is a practice of constant vigilance and decision-making. Missing small news updates could potentially affect your investment plan.

Monitoring and analyzing the market through the ESG lens can help you prevent the confusion that these shifts can add to your investment strategy.

Regardless of the market shifts, the ESG criteria stay the same and can help you ensure that your investment strategy never loses its sustainability focus during times of market uncertainty.

#3: An ESG Analysis Can Help You Find Truly Sustainable Investment Opportunities

Not all companies represent themselves accurately. ESG investing has grown in popularity over the past few years, and there’s a chance that some companies may try to benefit from the “trend,” without actually putting in the work.

The ESG label has become more appealing to companies — even if they don’t really fit the ESG criteria. This concept is referred to as “greenwashing” — portraying a company as environmentally minded for marketing, regardless of the company’s actual business practices.

Evaluating a company with the ESG criteria can help you determine whether the company’s operations truly meet the ESG requirements, allowing you to stay true to your sustainable investing strategy.

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How Can Individual Investors Be ESG Compliant?

There are several measures you can take to ensure that your investments stay true to the ESG philosophy.

#1: Screen ESG Indexes & Ratings

Even though a standardized ESG analysis can help you screen out ESG compliant opportunities, it might still turn out to be a very time- and labor-intensive process.

So instead of searching for ESG compliant assets yourself, why not invest in companies that already have a proven ESG track record?

The best place to find such companies are the various ESG market indexes that compile companies with top-rated ESG performance.

You can even choose to invest in exchange-traded funds (ETFs) or mutual funds that track these indexes, instead of picking individual stocks to invest in. This will also help you lower your risk by diversifying your investment portfolio.

Additionally, you can keep an eye out for companies that have been formally certified as ESG compliant by a professional rating agency, such as Fitch or S&P.

#2: Only Invest In Companies That Share Your ESG Beliefs

Sometimes, the easiest way to make sure that your investments are ESG compliant is to only invest in stocks or industries you know best and believe in.

In other words, you should invest in companies that share your passion for specific sustainability causes. For example, if your ESG focus is renewable energy, you should consider investing in companies that produce or provide renewable energy solutions.

While this simplistic approach may somewhat limit the scope of your investing strategy, it will help you stay true to your own interpretation of ESG outside of conventional metrics and factors.

#3: Employ ESG Consulting Services

ESG investing is a difficult undertaking for most investors to try alone.

ESG consultants have the knowledge, tools, and expertise to make environmentally conscious investing as simple as possible.

The somewhat daunting ESG investing challenges mentioned above can be tackled by an experienced professional. Personal ESG advisors:

  • Have the knowledge and experience needed to sort out greenwashed companies from genuinely beneficial ones
  • Have tools that allow them to compare and evaluate the ESG metrics of different companies
  • Have the training needed to make lucrative suggestions and work with your individual long-term goals
  • Will watch the changing market and suggest appropriate edits to the investment plan to compensate

ESG consulting services can simplify the process of sustainable investing and help you choose the perfect customized bundle of stocks to fit your investing goals.

Picture of ESG compliance specialist consulting an investor
The easiest way to ensure that your investments are ESG compliant and sustainable is to employ an ESG consultant who will guide your strategy ​

ESG Compliance Takeaways

The growth of socially responsible investing is undoubtedly a positive shift, as it has prompted many companies to start investing more in their sustainability practices and become more appealing for socially responsible investors.

However, this growth has also created some confusion and uncertainty in investors’ minds about what sustainability truly means and how it can be measured.

In Environmental, Social and Governance (ESG) investing these things are defined by the ESG compliance criteria that allow investors to evaluate the sustainability of their prospective investments using a standardized approach.

This approach can help you:

  • Find ESG compliant investment opportunities faster
  • Ensure that your investment strategy stays true to your ESG principles
  • Differentiate genuinely sustainable companies from those that “greenwash” themselves for marketing purposes.

The most secure way to make consistently socially responsible investments is to work with ESG investing consultants. These specialists can help you determine your socially responsible investing goals and the assets you should invest in to meet those goals.

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