Investments and exchange traded funds based on environmental, social and governance, or ESG, principles have been attracting attention. But what exactly is ESG investing about?
ESG investing has been around for years, with large institutional investors dominating the early stages of ESG investment growth as they possessed the requisite expertise and governance protection of well-resourced investment committees, according to a FlexShares research note.
However, these same resources available to large institutions are not usually scalable for smaller investors. Consequently, index providers have recently looked to key performance indicators, or KPIs, reported by public companies in regulatory filings in an attempt to facility product development for retail investors.
“For example, a typical KPI for governance reporting is ‘percent of women on the board of directors’,” according to FlexShares. “Presently, more than 100 KPIs are reported that can be classified as fulfilling at least one environmental, social or governance theme.”
SEE MORE: Do ESG Strategies Benefit ETF Investors?
Other major KPIs that cover ESG principles include environmental indicators, like electricity use, NOx emissions, total water usage, energy intensity per employee and regulatory risk exposure, among others. Social indicators include points like fatalities per 1,000 employees, community spending, human rights policy, percentage of community spending on EBITDA and fatalities among contractors. Lastly, governance indicators include points such as classified board system, size of board, poison pill plans, unitary or two tier board systems and percent ownership required for special meetings.
Through these indicators, it is now possible for asset managers to develop and apply systematic investment strategies to evaluate a company’s risk and opportunities, according to FlexShares.