ESG: Environmental, Social, and Governance 

What is ESG? 

ESG stands for Environmental, Social, and Governance, and it is a framework used to assess the sustainability and ethical impact of an organization's activities. Environmental factors consider the company's impact on the natural world, such as its carbon emissions, resource consumption, and waste management. Social factors focus on the company's relationships with employees, customers, communities, and other stakeholders, including aspects like diversity, labor practices, and community engagement. Governance refers to the company's leadership, transparency, and accountability structures, including board composition, executive pay, and risk management. ESG has gained prominence as investors and stakeholders increasingly recognize the importance of considering environmental and social factors alongside financial performance when evaluating the long-term sustainability and ethical practices of companies. 

Why are ESG scores important? 

Investors are increasingly looking at ESG factors as part of their investment analysis, recognizing the risk of tangible losses from unethical business practices and the long-term performance benefits of transparency and trust. 

But how exactly is an organization's ESG score determined? An external evaluator uses a scoring methodology and calculates the score based on a wide range of ESG factors, such as emissions and environmental initiatives, human rights, shareholders and board members. 

Many companies use ESG tools to better assess how well they are performing on a number of ESG issues, and to better understand the ESG performance of current and future partners. 

ESG and responsible investing 

Investing in ESG is about influencing positive changes in society by being better in all three aspects. Taking ESG factors into account in investment decisions not only benefits the environment and the society but can also provide competitive advantages for companies and investors by reducing financial, reputation, regulatory and strategic compliance risks. 

Three critical criteria for ESG investments: 

• Environmental: How do a company's actions affect the environment? This includes questions about the sustainability of the supply chain and the reduction of their environmental footprint.
• Social: How can a company increase its social impact, both inside and outside its community? Inclusion, gender equality and diversity are all factors to consider.
• Governance: How are issues related to executive pay, leadership diversity, and internal hierarchies addressed by a company? 

What are the risks of investing in ESG? 

The recent risk warning from the Securities and Exchange Commission (SEC) highlights five key challenges to investing in ESG: 

1. Weak monitoring of ESG-related investments. Significant shortcomings have been identified in the policies and procedures governing the implementation and monitoring of ESG investments. Consultants often did not have access to adequate systems for tracking and updating potential negative news screening of clients.
2. Unsubstantiated and misleading claims about ESG investments: Marketing materials describing unsubstantiated risk and other metrics related to ESG investments come in many forms.
3. Inadequate controls on ESG-related practices: A widespread lack of compliance with global ESG frameworks despite conflicting claims and failure to update marketing materials in ESG-focused areas are two of the most common examples.
4. Failure in Compliance Programs to Address Relevant ESG Issues: The SEC witnessed numerous instances where companies substantially involved in ESG investments were unable to demonstrate a sound and robust compliance and decision-making process.
5. Limited knowledge of ESG: Finally, a widespread lack of knowledge was noted. Relevant employees often lack the required knowledge and understanding of ESG and related issues. 

How can LexisNexis help improve your ESG scores?

Meet ESG requirements with Nexis Diligence+™ which a wealth of enriched data from an unmatched number of content sources to give you a comprehensive, 360-view of any person or company.

Fill the ESG information gap with Big Data

Big Data can help by supplementing your existing ESG information with comprehensive coverage of ESG factors. With Nexis^® Data as a Service (DaaS), you can integrate data such as PEP and sanction lists, national and international news and business information into your organization's own systems. This can give you deeper and more accurate insights so you can better understand how certain moves and decisions hurt or increase your ESG score. 

Media Monitoring on ESG topics 

With Nexis Newsdesk™ you can monitor print and online media on ESG related topics. With this media monitoring and analysis tool you stay informed of news and messages about your organization and so you can monitor your reputation. 

Using our proprietary LexisNexis^® SmartIndexing Technology™. ESG-related content is a good example of this. SmartIndexing searches content based on hundreds of ESG-related terms, including rating factors. In addition, the ESG Power Topic merges 175 terms, eliminating the need to build a complex query to filter the results for ESG-focused content.