What are ESG criteria and why are they important?

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We find ourselves in a context where citizens, associations, organizations, and institutions share the same challenge: solving climate change. To achieve this, a safe bet is implementing sustainable strategies to preserve and respect the planet’s natural resources. We know that a corporation’s decisions can have a positive impact on the environment and society in general. Therefore, it's important to evaluate each action of a company holistically, i.e., as a whole, and not individually. In this sense, it is desirable for each organization to communicate its mission, vision, and values and provide objective and transparent information on its activity. 

In this new context, the ESG — Environmental, Social, and Governance — criteria have become very important in recent years and have led to the figure of socially responsible investors. In other words, environmental, social, and good governance factors are the most valued by today’s investors, apart from financial results. This is not a trend, but the new behavior and concerns of shareholders who are focused on companies committed to the environment, society, and good corporate governance practices. 

The first of these therefore encompasses the effect of companies’ activities on nature. Organizations must not only mitigate the possible negative effects of their activity, but are also required to take actions that generate a direct positive impact such as, for example, reducing pollution, waste generation, or emission of greenhouse gases.

The second area analyzes the relationships with the communities where the company is present, assesses whether human resources are promoting equality and diversity among the workforce, as well as social inclusion. These actions must seek the creation of a healthy environment for both human capital and the local community in general.

Finally, the last area comprises issues related to the corporate governance of the company, its purpose, culture, production processes, and management. For instance, in this area, corporate governance can carry out the following tasks: consider the composition and diversity of the board of directors, draw up a code of ethics and best practice guide, check the supply chain to ensure compliance, and provide transparent tax information in its statements and all public information.

The World Bank issued the first green bond in history in 2008, and in just 10 years, ESG criteria mobilized more than $500 billion worldwide in sustainable investments. A large number of projects focused on renewable energy and energy efficiency were developed. It also led to major advances in areas such as sustainable mobility, agriculture, and sustainable infrastructure. And this does not end here, this trend is currently focused on fighting against the major problems we face today such as:

• Fighting against climate change by reducing the carbon footprint of companies and making better use of natural resources.
• Seeking funding for cancer research and supporting the most vulnerable groups.
• Promoting improvements in social aspects such as education, health, equality, etc. 

Moreover, according to the research paper “ESG factors impact the risk-return ratio” by the Spanish Institute of Financial Analysts, “taking into consideration sustainability aspects improves the risk-return ratio of portfolios.” We can say that companies that integrate ESG criteria and are more committed to society, obtain higher returns and generate a positive impact on all parties involved.