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

Social factors are related to the rights, well-being and interests of people and communities, and include factors such as (in)equality, health, inclusiveness, labour relations, workplace health and safety, human capital and communities. These factors are increasingly being considered in the business strategies and operating frameworks of institutions and their counterparties.

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. 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

Governance factors cover governance practices, including executive leadership, executive pay, audits, internal controls, tax avoidance, board independence, shareholder rights , corruption and bribery, and also the way in which companies or entities include environmental and social factors in their policies and procedures. 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.

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:

• 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