ESG Investing (Simply EXPLAINED! 2021 Version) - YouTube

ESG investing is a method to evaluate  companies. ESG Investing measures the  

sustainability and societal impact of a company  or business. So therefore, ESG investing would  

mean investing in a company that has good  societal impact. By doing an ESG analysis,  

it will help people better determine the future  of a business in the financial area. ESG helps  

small and large investors identify the risks and  growths of companies in the current stock market.

What does ESG stand for?

The acronym ESG stands for E,  environmental, S, social and G, governance.

Environmental

We begin with analyzing the environmental  impact of a company, both positively and  

negatively. This includes a company’s goals  for the environment such as climate change,  

carbon footprint and renewable energy use for  that company. A company that has a better impact  

on the environment may look as a better company to  invest in. For example: Nike, who has Flyknit and  

Flyleather products uses recycled materials  which positively supports the environment.

Social

Second, we look at the social  component of the company.  

Basically, we’re looking at how the  company treats its members and faculty.  

Usually, we will take a look at a company’s  diversity and gender ratios. Companies who  

support all genders or provide insurance for their  members may be a better company to invest in.

Governance

Lastly, the corporate governance of a  company shows the strength of their leaders.  

The governance focuses on a company’s  bonuses, board of directors,  

and how a company deals with shareholders. A  company’s corporate governance can be found  

on proxy statements on the SEC’s website by  searching for the filing type DEF 14A. Usually,  

a strong management team and board will  own shares of their own company’s stock.  

This shows that they believe in their  company’s growth and future success.

History of ESG Investing

So how did ESG begin? Over many decades,  many popular investors and management groups  

created the shareholder value theory which was  then popularized by Milton Friedman in 1970.  

Shareholder Value Maximization puts the  shareholders returns and pursuits of profit  

as their most primary objective. Wanting profit  isn’t necessarily problematic, however it could  

be if businesses are only concerned about making  short-term profit measures to please shareholders.  

Companies that chase approval by shareholders  rather than building relationships with employees  

of their company are more likely to fail  and go bankrupt. Obsessing over profit and  

earnings per share could cause lawsuits,  investigations and increased regulations.  

So therefore, ESG came around where  it didn’t focus on just profit.

Companies that did not maintain  good ESG can have serious risks

Stakeholder issues related to the environment,  social and governance of a company could  

become a serious risk to companies regardless  of how successful it was in the past.  

In 2019, PG&E declared bankruptcy because of  wildfires that burned up huge parts of California.  

PG&E didn’t do anything to prevent its fires  which caused its stock price to plummet.  

In 2020, Tyson Foods forced an employee to  work even with COVID-19 symptoms. The company  

also didn’t practice social distancing for its  employees. This is a good example of a company  

who doesn't pay attention to the social part of  ESG. In 2016, Wells Fargo opened fake accounts,  

made transfers into those accounts and assessed  bank fees without authorization from customers.  

This shows that Wells Fargo didn’t have good  control of the corporate’ s governance. These  

companies all failed to meet the standards of  a good ESG company which led to a lot of them  

being sued or going bankrupt. In conclusion, ESG  is important to include in all sorts of companies.

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