ESG refers to environmental, social and governance practices of businesses and describes astandard for sustainable investments. Most sustainability ratings are based on the analysis, evaluation and weighting of these ESG criteria.
With rising awareness of social and ecological criteria and regulations, an increasing number of providers are offering sustainable investment products. These are based on the three key sustainability-related areas of corporate responsibility:
• “Environment” measures the degree to which companies pollute or threaten the environment, greenhouse gas emissions or energy efficiency issues, and includes topics such as biodiversity, climate change, nature conservation, resource scarcity and water.
• “Social” includes societal aspects and covers topics such as unemployment, demographic change, nutrition and health, employees, work safety and health protection, diversity and equality, as well as social commitment (corporate social responsibility).
• “Governance” refers to fair and sustainable corporate principles and management practices and includes supervisory structures, civil rights, compliance, corruption, risk and reputation management, corporate values or management and control processes, and the utilization or manufacturing of weaponry.
ESG investment strategies follow the principle of exclusion.
When compiling sustainable investment portfolios, the ESG criteria (and ratings) serve as a guideline for which companies or even industries to exclude on principle if the pre-determined values are not met (this is also referred to as negative screening).
The exclusion criteria most frequently applied in Germany include human rights and labor rights violations, the production and trade of weapons, alcohol and/or tobacco, as well as the involvement in corruption and bribery, nuclear energy and environmental destruction.
A complementary approach is the inclusive "positive screening). For this, specific positive criteria are defined – often in conjunction with the best-in-class principle – to help determine which companies act and operate the most sustainable within their sector.
