ESG Factors

Definition

ESG Factors are Environmental Social and Corporate Governance conditions that are subject to Uncertainty and that may have a positive or negative impact on the financial performance or Solvency of an entity, sovereign or individual.

ESG factors can lead to negative financial impacts through a variety of risk drivers. The causal chains that explain how these risk drivers impact institutions through their counterparties and invested assets are called transmission channels.

Environmental Factors

Environmental factors can be defined broadly as environmental conditions that may have a positive or negative impact on the financial performance or solvency of an entity, sovereign or individual. Environmental factors are related to the quality and functioning of the natural environment and of natural systems, and include factors such as:

• Climate Change through Greenhouse Gas Emissions
• Resource Depletion (Water, Soil Nutrients, Fishing Stock)
• Energy Consumption
• Waste and Pollution (of Air, Soil, Inland Water, Oceans)
• Deforestation
• Other Environmental Degradation (Dam Construction, Deep Sea Mining)
• Biodiversity Loss and Protected Sites / Protected Species
• Animal Welfare / Animal Testing

Environmental factors can give rise to negative financial impacts through a variety of risk drivers that can be categorised as physical risks and transition risks. Environmental considerations may include:

Social Factors

Social factors can be defined as social matters that may have a positive or negative impact on the financial performance or solvency of an entity, sovereign or individual. Social factors are related to the rights, well-being and interests of people and communities, and include factors such as:

• Inequality
• Inclusiveness
• Labour / Employee Relations, Collective Bargaining
• Working Conditions
• Health and Safety
• Modern Slavery / Forced Labour
• Human Trafficking
• Child Labour
• Forced Resettlement
• Controversial Weapons
• Investment in human capital and communities and
• Human Rights

These factors are increasingly being considered in the business strategies and operating frameworks of institutions and their counterparties.

Governance Factors

Governance factors can be defined as governance matters that may have a positive or negative impact on the financial performance or solvency of an entity, sovereign or individual. Governance factors cover elements such as:

• management structures / executive leadership
• executive remuneration
• Board Diversity and structure / independence
• audits and internal controls
• product quality, safety and suitability
• shareholder rights
• bribery and corruption, illegal and unethical payments
• political lobbying and donations
• anti-competitive practices
• tax strategy / tax avoidance
• inclusion of environmental and social factors in policies and procedures.

Conciderations around the governance of public and private institutions with relevance to ESG factors (have an impact on or are impacted by institutions’ counterparties or invested assets, including governance arrangements for the environmental and social factors in counterparty policies and procedures) include:

See Also

• ESG Risks
• List of ESG Factors
• ESG Risk Transmission Channel