ESG and sustainable finance. What does this acronym mean?

ESG. If you search Google for this acronym, you will get a whopping 201 million results (!): everybody talks about it, but maybe not everybody knows what it is really about. Literally, ESG stands for Environmental, Social and Governance.

Environmental, Social and Governance factors qualify a business as sustainable. When making investment decisions, taking ESG factors into account means directing capital, your own savings, towards companies and projects deemed sustainable, e.g. that respect the environment, pay attention to workers' inclusion and wellbeing, and encourage the appointment of women to boards of directors. What we are talking about is sustainable finance.

Let's make it even clearer: environmental factors concern the need to foster production processes that are less energy-intensive and have less impact on the environment; social sustainability factors refer to relations with employees, inclusion, workers' wellbeing and human rights; lastly, governance factors include compliance with diversity policies in the appointment of boards of directors, the presence of independent directors or the forms of executive compensation, which are all key to ensuring that social and environmental aspects are taken into account by companies and organizations in their decisions.

ESG rating agencies specialize in assessing the sustainability level of issuers (companies, governments, supranational organizations), financial securities and collective investment schemes (OICRs and ETFs), which can be defined as "sustainable" or "ESG" precisely on the basis of their rating. It should be noted, however, that at the moment there are no shared sustainability assessment standards on an international level. European regulators are working exactly to set consistent criteria for the construction of ratings that can unambiguously identify which businesses or instruments are actually sustainable.

In this respect, much has been done, but there is still much more to do: for this reason, on the website #l'economiapertutti we offer a specific focus precisely on #sustainable finance so that you can become more familiar with this issue, seize investment opportunities and understand their risks. ... For once, there is something really important behind yet another mysterious acronym! And, speaking of difficult words, we have put together a handy glossary for sustainable investors: you can find it here (in Italian).