ESG Factors

Definition

ESG Factors are environmental, social or 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 are related to the quality and functioning of the natural environment and of natural systems, and include factors such as climate change, biodiversity, energy consumption, pollution and waste management. They can be defined as environmental matters that may have a positive or negative impact on the financial performance or solvency of an entity, sovereign or individual. Environmental considerations may include:

• Climate Change
• Greenhouse Gas Emissions
• Resource Depletion
• Waste and Pollution
• Deforestation
• Biodiversity Loss

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

Social Factors

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 Factors

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

See Also

• ESG Risks
• ESG Criteria
• ESG Risk Transmission Channel