Today, many traders seem to care about more than just sheer profitability of their portfolios: they also want their investments to be sustainable and socially responsible. However, checking every company you invest in is a pretty difficult task for a private investor, so you need some external source of such information. Many brokers have started providing such information based on a common rating called ESG score, and you can use it to invest responsibly. In this article, we explain how that rating works.
What is ESG
ESG stands for Environmental Social Governance; it is a framework that helps potential investors be aware of how a certain company manages various issues related to these three crucial factors. The environmental part measures the impact of a business on climate change, pollution, and waste. The social part examines how employees are treated and how local communities are affected. Finally, the governance part includes everything related to tax optimization, politics, board structure, and so on.
Every company can be analyzed and assigned a certain overall score that can be used to compare all kinds of businesses from various areas. This is called an ESG score, and many brokers calculate and publish it for their clients. Some traders mostly focus on how this score represents the ethical impact of certain industries, but others look at ESG more rationally: it can also be used to predict the success and sustainability of a business in the long term. That means ESG investing is pretty far-sighted.
How ESG score works
ESG scores can be used to create ratings and find the most sustainable companies, but you need to find a broker that has enough data to make such decisions. For example, eToro provides ESG scores for about 3,000 companies, allowing you to choose only the most sustainable ones. Using these is a must for long-term investors since sustainable businesses are more likely to be successful and stable in the future. However, day traders often ignore such ratings because of their specific timeframe.
If you want to use ESG scores to make investment decisions, you should be aware that there are not just one but many methodologies applied by different institutions to calculate them, and they seem to be updated frequently. It’s better to choose one source of ESG ratings and stick to it. It is especially easy if your broker has data on many companies.
