Environmental, social, and governance (ESG) criteria are a set of standards for a company's operation. These standards for operation are then used by socially conscious investors when screening potential investments. In the ESG framework, the environmental criteria considers how a company interacts with the environment in their operations and any activities it take towards environmental stewardship or sustainability. The social criteria considers how a company manages relationships with employees, suppliers, customers, and the communities where it operates. And governance considers a company's leadership, executive pay, audits, internal controls, shareholder rights, and data stewardship.
The ESG criteria is commonly used by investors concerned about companies activities in the above consideration, but also for advisors to avoid companies that can be considered to have a greater financial risk due to the company's environmental practices or other related practices.
Asset owners, among other stakeholders, are concerned with the way asset managers, such as private equity firms, assess ESG risks to inform buy-outs and acquisition decisions, and subsequently manage those risks. These assessments are an important consideration for stakeholders and whether the ESG criteria is generating opportunities for an organization, protecting current organization value, or exposing an organization to increased risk. As well, exposure assessment can help an organization understand the effectiveness of its ESG criteria, help an organization understand how stakeholders and possible investors can perceive an organization's ESG criteria, and help reveal opportunities for creating more non-financial goals to create a more attractive investment opportunity.
Companies offering ESG exposure assessments can help investors to understand an organization's ESG criteria and how it does or does not impact the organization's activities. An assessment can evaluate an organization's resource consumption, renewable energy use, energy and water consumption, waste generation, responsible sourcing, workplace safety, data handling, data breach exposure, social impacts on communities, human rights concerns, and exposure to corruption.
For investors, companies providing ESG exposure assessments can help an investor understand a possible investment risk exposure, which can use understood risk models and risk factors such as carbon regulations, water stressed regions, and corruption risks. The ESG exposure assessments can offer insight into company practices and how those practices— including policy commitments, certifications, and risk mitigation initiatives and programs—can create opportunities or increase an organization's exposure to risk. These assessments can also track an organization's performance and historical track record of an organization in ESG goals and related company operations and related controversies.
Companies offering ESG exposure assessments can help organizations assess and manage ESG risks and opportunities, help structure and improve the due diligence process, or conduct a due diligence assessment to uncover social, ethical, environmental, and safety risks associated with the organization's operations and practices. The assessment companies offer organizations outside expertise and perspectives and outside expertise an organization may not have access to alone. As well, they support organizations by the following:
- Identifying, assessing, and evaluating ESG risks associated with an organization's operations or a specific asset of that organization
- Harvesting big data to provide insights on physical, acute risks from climate change and other environmental factors
- Providing expert advice and support in all phases: first review, interviews with management, review of documentation in data, and verification of practices
- Providing an overview of ESG best practice, emerging megatrends and regulations for relevant countries, sectors, and products
- Delivering an ESG due diligence report, specifically set up to inform organization decisions
