ESG Criteria
Contents
Definition
ESG Criteria denotes the broad set of criteria measuring the sustainability and ethical impact of an investment in a company or business. ESG stands for Environmental, Social and Governance.
Environmental Criteria
Environmental considerations may include:
- Climate Change
- Greenhouse Gas Emissions
- resource depletion
- waste and pollution
- deforestation
- Biodiversity Loss
Social Criteria
Considerations may include issues such as
- Inequality
- inclusiveness
- labour relations
- investment in human capital and communities
- human rights
- modern slavery
- child labour
- working conditions
- employee relations
Governance Criteria
Concenrn the governance of public and private institutions, including
- management structures
- employee relations and
- executive remuneration
- bribery and corruption
- board diversity and structure
- political lobbying and donations
- tax strategy
Regulatory Guidance for the use of ESG Criteria in Lending
Institutions should incorporate ESG factors and associated ESG Risks in their credit risk appetite and risk management policies, credit risk policies and procedures, adopting a holistic approach [1]
Institutions should take into account the risks associated with ESG factors on the financial conditions of borrowers, and in particular the potential impact of environmental factors and climate change, in their credit risk appetite, policies and procedures.
The risks of climate change for the financial performance of borrowers can primarily materialise as physical risks, such as risks to the borrower that arise from the physical effects of climate change, including liability risks for contributing to climate change, or transition risks, e.g. risks to the borrower that arise from the transition to a low-carbon and climate-resilient economy.
In addition, other risks can occur, such as changes in market and consumer preferences and legal risks that may affect the performance of underlying assets.
See Also
Issues and Challenges
- The criteria cover a very wide and open ended domain which can complicate assessment, especially in a single ESG Rating
- There is no universally identified and agreed set of such criteria. A common reference is provided UNPRI, "What is responsible investment"[2]
